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COPYRIGHT DEPOSIT; 



The Pitfalls of 
Speculation 



1916 Edition 



BY 

Thomas Gibson 

Author "Cycles of Speculation," "Elements 
of Speculation," etc. 



Published by 

The Moody Magazine and 

Book Company 

35 Nassau Street, New York 

19 16 



tt&^ 



\5 



Copyright 1908 by 
THOMAS GIBSON 
Copyright 1916 by 
THOMAS GIBSON 

All rights reserved 



AUG 17 1916 

©0.A437378 

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CONTENTS 

Chapter Page 

I. The Impossibilities of Speculation 1 

II. The Public Attitude Toward 

Speculation 9 

III. Ignorance, Over-Speculation, etc.. 19 

IV. Manipulation 27 

V. Accidents 39 

VI. Business Methods in Speculation. 47 

VII. Analyzing Basic Conditions 57 

VIII. Market Technicalities 73 

IX. Tips 89 

X. Mechanical Speculation 99 

XL Short Selling 113 

XII. What 500 Speculative Accounts 

Showed 123 

XIII. Grain Speculation 135 

XIV. Suggestions as to Intelligent 

Methods 147 

XV. Simple Methods of Analysis 163 

XVI. Conclusion 179 



" So great are the opportunities offered 
by speculative changes, that, with proper 
methods and self control, the poor man 
cannot afford to overlook them." 



Foreword 

During the ten years which have elapsed 
since the "Pitfalls of Speculation" was first 
published a great many personal communica- 
tions have been received by the author asking 
for enlightenment on various phases of the 
subject. The question most frequently asked 
is how the novice may most intelligently go 
about the task of determining when general 
basic conditions and future prospects are 
satisfactory. It also appears that a great 
many people have no conception of the rudi- 
mentary elements of a railroad or industrial 
report and that, in their attempts to interpret 
the multifarious details of these documents, 
without understanding the basic principles 
thereof, they become confused and discouraged. 

In view of these facts, the writer has at- 
tempted in the 1916 edition to offer prescrip- 
tions and suggestions which may assist the 
reader. The two added chapters "Analyzing 
Basic Conditions" and "Simple Methods of 
Analysis" cover the essential points referred 
to above as fully as the limitations of space 
will permit. 



In the added chapter "The Impossibilities of 
Speculation," it has been the desire of the 
writer to forcibly impress and vigorously ex- 
pose the popular fallacies which bear upon 
speculative ventures. Much that is contained 
in that chapter was expressed in other words 
in the first edition, but the matter is important 
enough to bear reiteration. 

Aside from these additions, it has not been 
deemed necessary to materially alter the orig- 
inal text, as the test of ten years has brought 
forth no serious criticism of the general con- 
tentions offered. What is sought in the 1916 
edition is to amplify, rather than to revise. 



The Impossibilities of Speculation 

A Message. 

fllHE man who contemplates embarking on 
■*■ any speculative venture in the stock 
market may, without the slightest dan- 
ger of being deceived, adopt the following state- 
ments as being wholly sound, incontrovertibly 
true and fully supported by experience and 
precedent. 

i. — It is impossible to gain an enormous re- 
turn on a small capital in a brief period of time 
in speculative ventures. 

The possession of "inside information," full 
knowledge of conditions bearing on the secur- 
ity in which the venture is made, or any other 
advantages, cannot alter this truth. In twenty 
years of study of the subject, covering all con- 
ceivable methods of operation and with an in- 
timate knowledge of the affairs of thousands 
of speculators, the writer has never once seen 
this statement disproved. We hear and read 
of many such successes, but authentic cases 
are not established. 



2 THE PITFALLS OF SPECULATION 

This does not mean that, through wholly for- 
tuitous happenings, large profits have not been 
occasionally realized in a very short time. 
During the great rise in Bethlehem Steel and 
other stocks of that character in 19 15, a few 
owners of such issues were suddenly enriched. 
But to consider these instances a refutation 
of the principle expounded would be to beg 
the question. Such gains were the result of 
nothing more than accident. The holders re- 
ferred to had no expectations of any such re- 
sults and consequently did not speculate in 
anticipation of them. There is no possible way 
of turning such accidents into definite methods 
for future guidance. 

It is also conceded that a few outsiders, in- 
fluenced by the spectacle of rapid rises in prices 
of various war stocks in 191 5, ventured their 
small funds recklessly and won very large 
sums by gambling operations. That frequently 
happens in time of excitement and rapidly ad- 
vancing prices, but this class of operators 
never keep what they have won. They do not 
speculate at all — they gamble. In the nature 
of things, they will return to the game as surely 
as does the gambler with dice or cards, and 
they will eventually lose as surely as he does. 
To say that a man can recklessly plunge in the 
market, without knowledge of what he is 
about, and that he will, when accidentally for- 



THE IMPOSSIBILITIES OF SPECULATION 3 

tunate, conservatively invest his profits, is to 
endow him with two distinct and antithetical 
personalities. 

Many cases have been observed where a 
fortunate gambler with an original capital of, 
say, five thousand dollars, finding himself sud- 
denly possessed of fifty or a hundred thousand 
dollars, would accept his profits, invest the 
proceeds in government bonds and consider 
himself independent for life — but this conser- 
vatism is always evanescent. The fortunate 
man considers himself rich only until he grows 
accustomed to the suddenly increased income. 
Then he is poorer than ever, and sooner or later 
he returns to the game and loses all. The 
writer knows of many such cases. There may 
be exceptions, but they have not been person- 
ally observed. 

There is one great fundamental law governing 
all successful speculative ventures. Rothschild 
expressed it in five words, — "Buy cheap and sell 
dear," but the terse axiom is not simple — it 
it decidedly profound. To follow it, we must 
know when a thing is cheap and when it is 
dear. That is where the work begins and 
where the real success lies. Prices and values 
frequently become divorced. If we make our 
purchases when prices are below values, we are 
certain to succeed. If we buy when prices are 
above values we are certain to fail. Superficial 



4 THE PITFALLS OF SPECULATION 

appearances are useless in forming estimates 
of the relations of prices and values. They are, 
in fact, worse than useless, for when prices are 
far below values, appearances are invariably 
unsatisfactory and when prices are at the top, 
appearances are invariably promising. That is 
why the public always buys at the top, and 
sells, or refrains from buying, at the bottom. 

In determining when a certain security is 
cheap — that is to say, when its price is below 
its value — we cannot be guided by present con- 
ditions. These may be entirely satisfactory — 
earnings may be large, business good, dividends 
high, etc., but earnings may fall off, business 
may dwindle and dividends may be reduced. 
Speculation has to do with the future, not with 
the present. Present conditions are usually re- 
flected in current prices. To speculate on the 
present is a flat contradiction of terms. It is 
upon what may reasonably be expected to hap- 
pen next month, or next year, or in the next 
decade, that calculations must be based. The 
precedents of the past and the conditions of 
the present are useful only in assisting us to 
determine what is probable in the future. 

2. — No one can hope to succeed in specula- 
tive ventures unless he is financially fortified 
against any accidental happening which lies 
within the range of reasonable possibilities. 



THE IMPOSSIBILITIES OF SPECULATION 5 

The man who buys one hundred shares of 
stock on a thirty-point margin is frequently 
found bewailing his fate and his lack of cour- 
age in not taking three hundred shares on a 
ten-point margin, and by that method trebling 
his gains. He would better be congratulating 
himself that he has properly conserved the fac- 
tor of safety and made his gains on a sound 
basis. If he had yielded to the inclination to 
take three times as much stock as he did, he 
would have contracted a habit which is as cer- 
tain to result in ultimate financial loss as day 
is to follow night. Courage and boldness are 
essential ingredients in all speculative ventures, 
but courage and rashness are not interchange- 
able terms, as many people appear to think. 
For that matter, no man can be truly cour- 
ageous in his ventures, who is not sure of his 
ground and sure of his methods before he 
starts in. If he is not so fortified, every little 
wind that blows will chill him; every adverse 
happening or rumor will confuse or alarm him 
and he will either do the wrong thing at the 
wrong time, or lose too much sleep. Profits 
gained at the expense of peace of mind are a 
sorry bargain. 

3. — No man can make a decided and sus- 
tained success in speculation who depends 
upon the advice or direction of others. He 
must think for himself. 



6 THE PITFALLS OF SPECULATION 

It is, of course, wise to obtain all the good 
counsel possible, and to treat the opinions ex- 
pressed by others with such respectful atten- 
tion and due consideration as they may de- 
serve. But slavish dependence upon another 
man's views never made a great fortune for 
anyone in any line of business. Even if the 
advice given by others is of high repute and 
presumably dependable, it should be accepted 
as such only when it is fully understood. Ask 
your adviser, "Why?" and keep on asking him 
why until you are in full possession of his facts 
and deductions. Then you may weigh them, 
preferably after hearing the other side of the 
question, and be governed accordingly. If a 
man who anticipates speculating, recognizing 
his own limitations, confesses to himself that 
he has not the ability to understand, think and 
resolve, he would better adjure the business 
promptly and forever. 

No doubt, the reader who has followed the 
statements so decidedly set forth above will 
arrive at the conclusion that the rewards of 
speculation are not so great as. is popularly as- 
sumed and that the work involved is more than 
the ordinary man would have time or ability 
to undertake. In the first conclusion he is cor- 
rect. The returns to be made from intelli- 
gent speculative ventures, conducted along 
sound lines, are large, but the belief in great 



THE IMPOSSIBILITIES OF SPECULATION 7 

fortunes made in a few days by gambling 
operations in stocks is merely a widespread 
popular fallacy. No more great fortunes have 
been made in that way than in any other form 
of gambling. 

The thought and study involved is not so 
formidable a task as may appear. Many of 
the things which must be considered are mat- 
ters of more or less general education. As the 
intelligent speculator will find it necessary to 
keep track of such current events as crop 
prospects, railroad earnings and general eco- 
nomic conditions, the pursuit of such informa- 
tion will broaden his knowledge and be of help 
to him in any line of enterprise in which he 
may engage. Speculation, properly followed, 
involves, in itself, a liberal education in many 
lines. Like most other branches of human en- 
deavor, the necessary education is not nearly 
so difficult as it appears at first blush, and the 
pursuit of such knowledge soon becomes a 
pleasant as well as a profitable task. 

The statement cannot be too frequently re- 
iterated, nor too forcibly emphasized, that un- 
less the man who contemplates employing his 
surplus funds in speculative ventures is willing 
to undertake the work with a clear recogni- 
tion of the principles expounded, he will be 
much better off if he directs his attention to 
some other line of endeavor. 



8 THE PITFALLS OF SPECULATION 

"Many men/' said the late James R. Keene, 
"come to Wall Street to get rich ; they always 
go broke. Others come to Wall Street to 
operate intelligently for fair returns; they 
usually get rich." 



II 

The Public Attitude Toward Speculation 

THE public attitude toward speculation is 
generally hostile. Even those who ven- 
ture frequently are prone to speak dis- 
couragingly of speculative possibilities, and to 
point warningly to the fact that an overwhelm- 
ing majority of speculative commitments result 
in loss, while those who venture not at all, and 
consequently are incompetent to judge, dismiss 
the subject with the statement that marginal 
trading is gambling, pure and simple, and is 
therefore pernicious. 

Those who enter into the subject a little 
farther, and attempt to adduce more specific 
argument against speculative possibilities, lay 
stress upon the statement that manipulation, 
trickery and wholesale deception render it 
impossible for the outsider to enter the 
field safely or intelligently. These statements, 
usually unsupported, and frequently insup- 



io THE PITFALLS OF SPECULATION 

portable, are accepted by the prejudiced mul- 
titude as gospel truth, without any attempt 
being made to examine their foundation or cor- 
rectness. 

So far as the question of gambling is con- 
cerned, it would be entering a very large field 
to attempt to define just what is and what is 
not gambling. 

The idea that the man who buys a certain 
stock outright invests, while he who buys on 
margin gambles, is a popular fallacy. The 
speculator purchases in the hope of an advance, 
and if two purchases are made for parallel 
reasons, one for cash, and one on margins, both 
purchases are speculative. 

That speculative fluctuations are largely 
used as a basis for gambling operations, is un- 
questionably true, and possibly an acceptable 
dividing line may be drawn on the following 
hypothesis: gambling, in the general accept- 
ance of the term, is founded upon blind chance, 
the equal possibility of certain events occurring 
or not occurring; this is modified in some cases 
by the exercise of superior skill in such games 
as admit of skill ; but fundamentally, gambling 
is wholly dependent upon the equal chances of 
two or more opposed individuals. 

The trader, therefore, who takes "flyers" 



ATTITUDE TOWARD SPECULATION u 

with no knowledge of his subject, or the prop- 
erties in which he deals, merely gambles on the 
ultimate rise and fall of the market; but the 
trader, who, after careful investigation and 
study, purchases a property, either outright or 
on margins, because he has reasons for be- 
lieving it to be cheap, and that it will enhance 
in value, is a speculator. 

Those composing the gambling element are 
in the majority, and it is needless to say, are 
the greatest losers; in fact their losses foot up 
almost the sum total of speculative deficiency, 
and consequently the sum total of the gains 
reaped by the real speculator. 

The statement that most public commit- 
ments are made on no better foundation than 
a mere guess, may seem a trifle bold, and the 
counter statement may be made that few 
people purchase a stock without some reason 
for so doing. This is admitted on the same 
basis that the man who bets on a certain num- 
ber at roulette because it has not recently ap- 
peared, or in hope of an immediate repetition, 
considers that he has a reason for his action. 
Thus a great number of amateur, or semi- 
professional traders, buy a certain commodity 
for no better reason than that the stock has 
declined, or, more frequently, from a partici- 



w THE PITFALLS OF SPECULATION 

pation in a period of speculative intoxication* 
They can give reasons for their ventures, but 
they are without foundation, and are no more 
worthy of consideration than the reasons given 
by the roulette player for "staking" upon a 
certain number. 

On the other hand, the speculator, with a 
carefully acquired knowledge of the normal 
value of certain properties, fully posted on 
conditions in general, and those affecting, or 
liable to affect his favorite property in par- 
ticular, patiently waits the opportunity to buy, 
not at a normal price, but at a price far below 
the actual value of his property. He knows 
that speculative prices move in cycles, more or 
less pronounced and prolonged, and in the 
revolution of this cycle he will be given an op- 
portunity not only to purchase at a price far 
below a normal valuation, but to sell at a 
price far above it. 

This looks simple enough in the telling, and 
is merely the operation of Anselm Rothschild's 
famous advice, "buy cheap and sell dear." 
But when the statement is made that over 90% 
of public purchases are made at the approxi- 
mate high tide of a market and about the same 
percentage of sales at the approximate low 
tide, in short, that the most simple and reason- 



ATTITUDE TOWARD SPECULATION 13 

able methods of making money are not only dis- 
regarded, but actually reversed, a great field 
for analysis and discussion presents itself. 

Manipulation and trickery are vastly over- 
estimated: popular prejudice continually ac- 
cords to such causes events which were brought 
about almost wholly by the composite folly of 
public participators in speculative affairs, and 
which could not possibly have been effected by 
any individual interests. 

That these stages of uj^dpe depression and 
inflation are to some extent assisted by the 
shrewd minority, is true; but the great work 
is that of the public itself. 

That the money-making minority foresee, 
and take advantage of these extremes, is un- 
questionable. They are the cause of all specu- 
lative movements of importance, and through 
the errors and losses of the lambs the ac- 
cumulations of successful operators are made 
possible. 

After a careful examination, covering a 
period of ten years, and a study of the methods 
of successful and unsuccessful traders as 
shown in some thousands of speculative ac- 
counts, the following facts are adduced: 

1st — The greatest causes of loss in specu- 



i4 THE PITFALLS OF SPECULATION 

lation are ignorance, over-speculation, and 
carelessness, of importance in the order named. 

2nd — The popular fallacy that business 
methods are not applicable to speculation is 
wholly erroneous. 

3rd — Not one speculator in a thousand ap- 
plies ordinary business precautions to his 
trades, nor founds his ventures upon knowl- 
edge of any value. 

4th — The correct trader has little to fear, 
and much to gain from manipulative tactics. 

5th — While extremes of prices move in ir- 
regular cycles, no "system" for judging 
changes is possible, or tenable, as such me- 
chanical attempts to forecast price changes do 
not contemplate changed conditions, or pro- 
vide for accident. The advocates of the "Chart 
System" are legion, and yet it is impossible to 
find a single permanent and substantial gain 
made by this method. 

6th — The general idea that the actual value, 
and probable future of a property cannot be 
intelligently based, is erroneous. 

7th — The greatest speculative profits are 
made in stocks, and the greatest speculative 
losses, in staples: wheat, corn, cotton, etc. 

8th — There are certain technical stages, or 
conditions of markets which are followed by 



ATTITUDE TOWARD SPECULATION 15 

certain invariable results, the study and recog- 
nition of which is valuable, and not difficult 
These "ear-marks" are in some cases very- 
plain, and do not in any way smack of the 
"systems" deprecated above, but are more or 
less visible signs of effects following certain 
causes. 

9th — Almost every % general idea of specula- 
tion is the exact reverse of the truth. Some- 
times this is caused by false reasoning, but 
most frequently by the innate false appearance 
of the market quotations. For example, great- 
est activity and interest in a market occurs 
around top prices; while dulness and stagna- 
tion are invariable when properties are un- 
reasonably low in price. 

10th — Persistent short selling of stocks is 
fashionable in a certain class of semi-profes- 
sional traders, and almost invariably results in 
loss. 

nth — Tips are illogical. Any wide-spread 
dissemination of advance information as to a 
projected movement would defeat its own ob- 
ject. The so-called "tip"' is usually mere guess 
work. The general consensus of public opinion 
on this subject is correct, i. e., tips are value- 
less ; and yet the public continues to use them 
largely as a basis of trading. 



16 THE PITFALLS OF SPECULATION 

1 2th — Too great facilities for obtaining in- 
formation and executing orders, is, to the or- 
dinary trader, of no advantage, and is fre- 
quently a source of loss. (The accounts men- 
tioned above show the most intelligent trading 
to have been done by traders who were with- 
out facilities to interfere with their own 
original plans through fright or confusion.) 

13th — Speculation is a safe business when 
business methods are applied to it. The 
changes in prices of standard properties offer 
yearly greater opportunities for profit than any 
other field. That is to say, for reasonable pro- 
fits, not for the amassing of fortunes on small 
capital, in a brief period, but for steady ac- 
cumulation of money and valuable knowledge. 
So great are the opportunities offered by specu- 
lative changes, that with proper methods and 
self-control, the poor man cannot afford to 
overlook them. 

To make these rather radical statements in 
a general way is wholly insufficient; each 
statement must be supported by the presenta- 
tion of convincing precedent and clear reason- 
ing, and it is the purpose of these articles to 
point out the reasons for the failure of the 
majority, as well as the methods by which the 
minority succeed. This done, the knowledge 



ATTITUDE TOWARD SPECULATION 17 

so gained must be insulated into useful chan- 
nels, and combined into flexible rules, and in- 
flexible laws. 

It is not claimed that it is possible to set 
down in print a formula for speculative suc- 
cess: much depends upon the individual. A 
man is not a machine, and will be frequently 
swerved into paths which he, himself, knows 
to be dangerous, and an individual incapable of 
clear thinking and correct application of ac- 
crued knowledge, would not succeed at this, or 
any other business. 

The most that may be hoped for, conse- 
quently, is to point out certain facts which will 
lead to a correct line of thinking, or open the 
way to profitable discussion. To this end, the 
various causes of loss mentioned will be dis- 
cussed in turn. 



Ill 

Ignorance, Over-Speculation, Etc. 

IGNORANCE, over-speculation, and the in- 
nate false appearance of market stages are 
the principal causes of speculative loss, 
and are, in truth, the principal causes of the 
great cycles of speculative extremes. These 
extremes are variously attributed to specific 
causes, affecting certain securities, to good or 
bad business conditions, or to accident or man- 
ipulation ; but the fact of the matter is that the 
wide swings of the market are brought about 
almost wholly by the errors and ignorance of 
the great body of traders known as the public. 
Conditions change, accidents occur, and 
manipulation exists, and all have their effect; 
but unless these factors were supplemented by 
alternate waves of general over-confidence, 
and subsequent undue depression, the fluctua- 
tions in market quotations for standard prop- 
erties would be confined to such narrow limits 
that the repeated opportunities to purchase 
such properties at prices far below, and to sell 

19 



20 THE PITFALLS OF SPECULATION 

them at prices far above a normal value, would 
be eliminated. 

Almost all the commitments made by public 
traders are made on faith, or on misleading 
surface appearances. The advice of people 
absolutely incapable of passing intelligent 
opinions, is eagerly listened to and frequently 
acted upon; large dividends on low-priced 
stocks are made the basis of optimistic views 
and shallow arguments ; the fact that a certain 
stock has dragged back in a generally strong 
market, — usually the best evidence in the 
world of something radically wrong with that 
particular stock, — incites what may be very 
undesirable purchases. The development of 
certain long-heralded events, such as the pay- 
ment, or increase of a dividend, is considered 
a good reason for the purchase of the security 
affected, when in fact it is no reason at all, as 
Wall Street always anticipates and discounts 
probable good news. These and a hundred and 
one other reasons, mostly ill-founded, are the 
groundwork of the great bulk of public ven- 
tures, and the individuals who operate on these 
unreliable signs, with full knowledge of the 
fact that the public has been misled by them 
time and again, seldom attempt to investigate 
the intrinsic value of the property in which 



IGNORANCE, OVER-SPECULATION, ETC. 21 

they have assumed and paid cash for a pro- 
prietary interest. Such an investigation is 
usually considered useless or impossible. If 
this were true any participation whatever in 
speculative affairs would be folly, but fortu- 
nately this common opinion is itself the result 
of ignorance. 

Over-speculation, the composite result of 
ignorance, greed, and false appearances, may 
be classed as the primary cause of wide varia- 
tions in prices, for as much too high as a mar- 
ket is carried by rash participation at high 
prices, just as much too low will it sink in the 
ensuing decline. The ill-advised traders who 
rush in at high prices with inadequate capital 
are the first to suffer; their overthrow topples 
over other weak accounts, and so on down the 
line, until the last of the wobbly row of bricks 
has fallen. 

It might be contended that when this pro- 
cess of elimination had brought prices of good 
properties to a fair valuation, purchasers would 
be easily found, and such might be the case, 
were it not for the fact that the great lights of 
speculative finance know full well that the 
technical position of the market is still bad; 
that many venturers, already financially weak- 
ened by the decline from abnormal to normal 



22 THE PITFALLS OF SPECULATION 

prices, are in a position which they can be forced 
to abandon; that the pendulum of prices will 
swing to the other extreme, and they refrain 
from buying at normal prices for the good and 
simple reason that they know they can even- 
tually buy at prices that are very low. Perhaps 
these low prices will come about unaided, 
through the internal rottenness of the techni- 
cal situation ; perhaps the desirable consumma- 
tion will require a little assistance, such as the 
passing of a dividend or two, the closing of a 
few mills or the laying off of a few men, all of 
which actions can in the future be pointed out 
as good and conservative business moves, but 
which will be received by the public with anger 
and disgust ; for so dense is general ignorance 
on this one subject that the payment of a divi- 
dend is always considered good, and the reduc- 
tion or passing of a dividend is always con- 
sidered bad; a bond issue, for whatever pur- 
pose, is an unmixed evil, and so following. 

The professional bear element also assists in 
the final downfall of prices. They will be well 
aware of the assailable condition of the 
weakened long interest, and will attack the 
market for the purpose of reaching stop-loss 
orders or forcing crippled speculators to sell. 
These same bears may later be hoist with their 



IGNORANCE, OVER-SPECULATION, ETC. 23 

own petard, for a chronic bear is a chronic 
loser, but meanwhile they assist the successful 
campaigners materially by forcing a tempor- 
arily lower level of prices and supplanting 
weak long accounts with a short interest, 
which is in itself a great advantage to the bull 
element. 

So familiar is the experienced speculator 
with public weakness that he is usually found 
operating in direct reversion to prevailing sen- 
timent. He knows by careful and clear-headed 
investigation the normal value of the property 
or properties in which he trades, and at such 
time as he finds the current quotations far be- 
low this fixed point and the public inveighing 
bitterly against his favorite issues, he begins 
his purchases. It does not require much 
shrewdness to deduce the fact that if a certain 
standard security has passed out of public, or 
weak hands, it has of necessity been concen- 
trated in the strong hands of the giants of 
finance, and that the purchaser at such periods 
is at least in good company. He has no fear of 
any abnormal shrinkage in the value of his 
holdings, as such sudden shrinkages are the 
result of panic or financial necessity, to which 
the present holders are not subject. He also 
knows that any manipulation must now be for 



24 THE PITFALLS OF SPECULATION 

the purpose of creating higher prices, as the 
next great speculative move will be to resell 
the cheaply purchased properties at high 
prices, and the public being absent, there is no 
one to manipulate against. He is certain that 
unless all precedents fail, he will, at some 
future time, see high prices and general good 
feeling supplant the present depression. 

As has been stated, the innate false appear- 
ance of speculative surroundings does much to 
influence public participation at the wrong 
period. When stocks are low in price the 
brokerage offices are deserted, the newspapers 
say little of speculative affairs, transactions are 
limited, and those who have been worsted in 
the preceding decline speak in pessimistic 
terms of the future. A long period of dullness 
almost invariably follows a severe decline, new 
lambs must be born and the old ones suffered 
to grow a new fleece, and dullness is always 
unattractive. But at the crest of a great move- 
ment all is activity. Excited groups gather 
about the tickers and predict future events 
founded principally on illusions or hope, and 
stories of quickly acquired gains are heard on 
every hand. A fever of speculation fills the air 
and men who had no thought of venturing 
during the time of depression and low prices, 



IGNORANCE, OVER-SPECULATION, ETC. 25 

now purchase anything and everything at 
prices that are very high. 

The mistakes discussed above — ignorance; 
the belief that speculative riches are the result 
of luck rather than of judgment, over-specula- 
tion and misleading surface appearances, com- 
bine to make it possible for the shrewd and 
successful minority to buy and sell periodically 
to great advantage by an almost exact reversal 
of public methods and beliefs. Their opera- 
tions are not founded on such reversion, but on 
study and knowledge of past precedent, present 
conditions and future probabilities. The fact 
that public opinion is diametrically opposed to 
their views may be cheerfully considered as ex- 
cellent proof of the correctness of their de- 
ductions, as the public is usually wrong. 

If the statements made above are admitted 
to be correct the lesson they teach is obvious. 
To result successfully, speculative ventures 
must be based on sound reasoning and a 
knowledge of correct normal values; on a 
willingness to confine operations to reasonable 
limits and upon emancipation from the moving 
influences of general exhiliration or depression. 
The individual who begins or pursues his oper- 
ations on these great fundamental principles 
has taken a great step toward the goal of suc- 
cess. 



IV 
Manipulation 

THERE are two classes of manipulative 
tactics indulged in by the inside workers 
of Wall Street ; the long range tactics of 
the great but silent workers who lay a plan 
contemplating a complete speculative cycle 
from high to low prices, and the more frequent 
and drastic operations of room traders who 
find a market in a bad technical position and 
operate for known effects, either as a matter of 
immediate profit or to rid themselves of a dan- 
gerous following. The success of both is de- 
pendent upon public folly. 

In the first class lies the hidden and care- 
fully calculated work of haute finance. It con- 
sists of creating, or helping to create, false im- 
pressions as to the value of a certain property, 
of lending encouragement to buy at high 
prices, or to sell (or at least to refrain from 
buying), at low prices. The motives are 
obvious : to create a demand for the goods for 

27 



28 THE PITFALLS OF SPECULATION 

sale, and to create a supply of the goods whose 
purchase is contemplated. 

This high form of financiering is always 
helped by shrewd choosing of propitious 
periods and surroundings, and its moving fac- 
tors, though potent with result, are so veiled 
and untraceable as to render supportable criti- 
cism impossible. 

The recent price movements of the proper- 
ties of the United States Steel Corporation fur- 
nish a pointed example of this method of finan- 
ciering. The stocks were offered to the public 
at prices which were really fair, statements 
were issued which were unquestionably cor- 
rect, and dividends were paid which were 
doubtless earned. The periodical reports were 
rosy, but they were true. The great earnings 
were made, and called attention to the high 
tide of a period of unusual activity and prices, 
but the public did not take the trouble to as- 
certain this important fact. They saw only 
one thing, that large dividends were being 
paid, and still larger earnings being carried to 
surplus, by a company whose stocks were sell- 
ing at low prices. They looked neither back- 
ward nor forward, but glued their eyes upon 
the insufficient facts of the present. A little 
knowledge would have proven that not only 



MANIPULATION 29 

were the recent and present earnings unusually 
large, but that all such abnormal periods are 
followed by a reaction. 

These simple facts, known and recognized in 
the abstract as being true of all businesses, 
were lost in the greed and fever of speculation. 
Knowledge and study played no part in the 
affair; the present was all-sufficient, and the 
public bought largely, both for investment and 
on margins; and by the same token, the pro- 
moter sold. Later the earnings fell off, which 
was perfectly natural, money was lavishly dis- 
bursed, their holdings increased by the pur- 
chase of new properties ; the surplus dwindled, 
and dividends on the common stock were re- 
duced and eventually suspended altogether. 

A public change of heart took place, and 
views of the company's future changed from 
extreme rosiness to cross-grained cynicism. 
Again the present was made the only stan- 
dard; the stock was watered; the common 
shares were absolutely worthless; future divi- 
dends were impossible, etc. 

The fact that a great deal of money had been 
intelligently diverted into channels which 
could not but enhance the future value of the 
corporation was not considered, and so, during 
a natural period of reaction, the disgusted 



3 o THE PITFALLS OF SPECULATION 

public gradually relinquished their holdings, 
and they passed back, little by little, into the 
hands of their original owners at prices ridicu- 
lously low. 

From the standpoint of the great manipu- 
lators, it was beautifully done. Not one argu- 
ment could be brought against them which 
could not be amply defended. "We paid divi- 
dends because we earned them, and you, our 
Stock-holders, clamored for them and approved 
of them; we gave to the world statements of 
every dollar received and disbursed; nothing 
was misrepresented, nothing was concealed. 
When the iron and steel business suffered a 
relapse, and our surplus had been lowered by 
excellent and necessary expenditures, we did 
what every business man does— decreased our 
expenses and our dividends until an improve- 
ment was apparent. We are not responsible 
for the actions of Wall Street, and if you, as an 
individual, made ill-advised purchases and 
sales, or over-speculated, that is no fault of 
ours. Yes, we did, as individuals, sell some 
stocks at prices which we considered fair, and 
likewise re-purchased at prices which are con- 
sidered low. That was a matter of business, 
and was our privilege. We have absolute con- 
fidence in our properties and their future and 



MANIPULATION 31 

always have had. You cannot blame us for 
your mistakes ; you beat yourselves ; get out P 

This is unanswerable, but the fact remains 
that these men knew what the effect of their 
actions would be and acted accordingly. No 
one who has a personal acquaintance with Mr. 
Morgan and his principal lieutenants would 
harbor any thought of their having participated 
in the general enthusiasm, and making the 
error of themselves believing there would be 
no reaction in the large earnings and good 
condition of the affairs of the Steel Corpo- 
ration. Never. 

That they had faith in their properties is 
literally true, and it is doubtful if the largest 
holders would have parted so freely with their 
stocks but that they knew absolutely what 
would happen, and that the stocks would per- 
force be returned to them at low prices. 
Neither did they find it necessary to cripple or 
permanently injure their great consolidation to 
bring about their grand coup. The shares had 
the same inherent value at the lowest range, 
as at the highest. 

It is unquestionably true that if the mag- 
nates "who never speculate" had not foreseen 
and acted upon public folly, no dividends 
would have been paid which could not have 



32 THE PITFALLS OF SPECULATION 

been maintained, and instead of the wild pyro- 
technics and wide-price range of steel stocks, 
the properties would have steadily increased 
in value from the birth of the concern. 

There is nothing new in all this — it is a time- 
honored method of speculative financiering, 
from the repetition of which the public seems to 
learn nothing, and from which the most power- 
ful interests make their largest returns. 

The second class of manipulation, more 
recognizable as such, is more brief as to period 
and more restricted as to results, but is potent 
enough at times to bring about changes and 
appearances which either force or frighten 
holders out of a good position, or mislead them 
into a bad one. 

The cry is frequently heard that the public 
is not in the market, and this state of affairs is 
usually pointed out as a reason for stocks not 
advancing. This view is another evidence of 
the reversed reasoning so prevalent in specu- 
lative matters. 

The very last thing the great speculators 
want in the market is such an interest at low 
prices, or even at midway points in an advance. 
So undesirable, in fact, is such an element that 
its presence means defeat for the sponsors of 
the deal themselves, and a projected movement 



MANIPULATION 33 

is sometimes abandoned temporarily on ac- 
count of too large a following. The most ap- 
proved method, however, is to "shake out" and 
discourage this following. The process is 
simple ; the great inside element finding them- 
selves in company of numerous "tailers," 
whose weakness and liability to panic on the 
slightest pretext may ruin their own devices, 
take advantage of just such known weakness, 
and with the assistance of the professional 
bears, proceed to drive their undesirable friends 
away. To accomplish this, support is with- 
drawn and a portion of the accumulated hold- 
ings sold ostentatiously. The bear element, 
fully aware of the assailable state of the 
market, assists the manipulators by heavy sales 
and vicious drives. The enthusiastic public, 
crippled, discouraged and disgusted, drop their 
holdings, and a considerable number of half- 
baked bears join in the same game of "follow 
the leader," until a short interest is created. 
Meanwhile, the original projectors replace 
their holdings at opportune times, perhaps at 
a lower average than that at which their spec- 
tacular sales were made, perhaps not — but the 
physicking has been accomplished, the atmos- 
phere is cleared, and the "deal" which they had 
never for a moment contemplated abandoning, 



34 THE PITFALLS OF SPECULATION 

goes merrily on until such time as another 
purging may be necessary. 

These two forms of speculative tactics, with 
their various off-shoots, constitute the funda- 
mental basis of manipulation. They are widely 
different; the one, the long distance work of 
the great "financier" who pays no heed to 
ordinary movements, but works toward a 
great end; the other, the tactics of purely 
speculative interests. The first is responsible 
for the long swing of the market; the second 
for many of its sharp intermediate changes; 
but both are united in one thing, they work to- 
gether for the undoing of the general public. 

The man who invests, or speculates for the 
long swing may, like the first class, disregard 
all ordinary hippodroming, and await certain 
results. 

The man who indulges more freely in specu- 
lative* ventures must bring to his aid clear 
thinking, study and vigilance. Above all things 
he must provide for sharp changes financially, 
and if he is caught in a flurry, his embarrass- 
ment will be only temporary. 

In both cases everything depends upon an 
intelligent basis of normal valuation, for to that 
basis, if correctly estimated, the price of his 
holdings will eventually revert. 



MANIPULATION 35 

All the manipulation, accident and trickery 
in the world can not keep prices too low nor 
too high for long. The needle of the compass 
may be disturbed and swing nervously from 
side to side, but it must point to the true north 
at last. 



36 THE PITFALLS OF SPECULATION 

NOTE. — Since the foregoing chapter was 
written, ten years ago, there has been a marked 
change bearing on both the forms of manipu- 
lative tactics referred to. Happily, this change 
is for the better in both cases. 

The long-distance inside manipulative tactics 
have suffered a decline. The exploiter of stock- 
holders for personal profits is a decaying genus. 
This may not appear a correct statement in 
view of the Rock Island scandal and a few other 
cases of like character, but it is true, neverthe- 
less. The names of the individuals or groups 
still struggling to carry out the predatory 
methods which were so popular in the Gould- 
Fisk-Vanderbilt days may be checked off on 
the fingers of one hand and, what is more im- 
portant, these people are not meeting with their 
customary success. By the same token the 
properties which are discredited or in receiver- 
ship will correctly check with the names of 
these individuals. Our railroads, considered 
as a whole, are no longer the toys of big gam- 
blers and manipulators. A great majority of 
the properties are honestly and successfully 
administered. This is largely due to legal 
measures and restrictions. No matter how 
much people may criticize the actions of the 
Interstate Commerce Commission, that body is 
the stockholder's best friend. They have made 
it possible for him to analyze with some assur- 



MANIPULATION 37 

ance of accuracy the conditions, physical and 
financial, pertaining to his property. They 
have made the work of the exploiters increas- 
ingly difficult. They have been of genuine as- 
sistance to the railroads themselves in many 
ways, by eliminating free passes and rebates 
and by curtailing the activities of stock market 
buccaneers. 

In the secondary form of manipulation, i. e., 
the active juggling of securities and quota- 
tions, there has also been great improvement. 
The Governors of The Exchange have adopted 
every intelligent means in their power to dis- 
courage and punish this sort of thing. 

So far as "washed sales" are concerned, 
this pernicious practice is still carried on to 
some extent, but only when it cannot be de- 
tected and proved. Without the use of this 
laundry machinery, the manipulators find the 
bidding up of prices or the "shaking out" of 
holders a difficult and, at times, an expensive 
operation. 



V 

Accidents 

ACCIDENTS or unexpected events fre- 
quently mark the beginning of sharp or 
extended declines. It is generally con- 
sidered that anything in the nature of an acci- 
dent must be in favor of the bear element. 

This theory in the abstract is sound enough, 
as accident and disaster are nearly synony- 
mous, but careful consideration of the subject 
will develop the fact that in the speculative 
world accidents are more frequently the excuse 
for, than the cause of, any severe or extended 
decline, and their effects are to be measured by 
the stage and condition of the market, rather 
than by their actual capacity for evil. 

Nothing in the nature of the unforeseen can 
be conceived as happening which could per- 
manently injure or retard the growth and value 
of good properties. 

The United States has such recuperative 
power that the naturally increasing value of 
her properties can easily overcome the tempo- 

39 



40 THE PITFALLS OF SPECULATION 

rary effects of unforeseen occurrences. It is 
reasonable to believe that if all the accidents 
which have occurred and have been pointed out 
as the cause of great market changes in the last 
ten years had never happened, stocks would 
still be at the same approximate level as they 
are today. 

It is admitted that accidents frequently ad- 
minister the little shove to an already bad state 
of affairs which hastens a decline that must 
have eventually and inevitably occurred, acci- 
dent or no accident. This is not wholly an un- 
mixed evil, as it may be the means of checking 
excesses, which, if allowed to continue, might 
result in even more severe consequences. 

On the other hand, an accident may some- 
times mark the very beginning of a great up- 
ward movement by frightening from the 
market at low prices weak and foolish specu- 
lators whose very presence spells danger, and 
attracting to it far-seeing men who gauge 
prices by values. 

The danger of adverse litigation, (which may 
be classed among unforseen events), against 
good properties is slight. Annually, numer- 
ous tirades are begun against combinations and 
individual corporations in the legislative halls, 



ACCIDENTS 41 

or in the columns of the public press, supple- 
mented by the failing of the notoriety-seeking 
charlatans who find it popular to inveigh 
against capital in general, but the fact remains 
that no measures will be taken, or at least no 
measures can endure, that will prevent the 
builders of railroads, or the capitalizers of 
great industries from making good returns on 
their money, or from seeing their investments 
grow in value through the advance of demand 
and population. Such measures, expounded by 
dreamers, or socialistic tin-horn tooters, strike 
at the very foundation of business extension, 
and per contra, any individual or coterie of in- 
dividuals, who seek to overdo the extension of 
capital, or make it bring exorbitant and un- 
natural returns, will, like the toad in the fable, 
burst by self-inflation. 

Stripped of these two extremes, business 
conditions are sound and solid, and gradual 
growth and prosperity are assured. 

The unexpected calling of loans, the ex- 
portation of gold, the killing of crops, sharp 
changes in the attitude of foreign markets, etc., 
are matters which are to be expected annually, 
either as natural or manipulated events under 
any and all conditions, and are almost wholly 
impotent to change the course of a long swing 



42 THE PITFALLS OF SPECULATION 

to high or low prices. Like the boy who cried 
"Wolf, Wolf/' on every occasion, they lose 
their importance by repetition. 

True, these minor signs may to the close 
student sometimes appear as straws indicating 
the course of the financial wind, but generally 
speaking, nothing short of a wide-spread and 
severe disaster can change the course of the 
great cycles of speculation, the repeated and 
unchecked revolutions of the wheel of fortune. 

A good illustration of the statement that 
accidents frequently prove merely the puff of 
wind which topples over an already rotten 
structure, is found in the death of the late R. P. 
Flower. This unexpected occurrence was fol- 
lowed by a radical and extended decline in the 
properties known as the "Flower Stocks." It 
cannot be reasonably claimed that the cancel- 
lation of Mr. Flower's personality affected the 
securities in question, as the number of stocks 
in the group, and the fact that he had no voice 
in the affairs of some of his favorites, com- 
bined to render any personal direction of the 
internal workings of the properties involved, 
impossible. His personal efforts, for instance, 
could not have sustained Brooklyn Rapid 
Transit above par; the stock was not, and 
never has been worth the prices at which it 



ACCIDENTS 43 

sold. It may, probably will, at some future 
day be cheap at that figure, but at the time in 
question, the price was premature, if not ridicu- 
lous. What followed Mr. Flower's demise 
must have occurred from its own inherent 
weakness, sooner or later; the event simply 
hastened the inevitable. 

It is not the intention in the above illus- 
tration to cast any aspersions upon the 
methods or memory of the financier; he was 
sincere, but an enthusiast. He told his friends 
certain things would happen, and believed they 
would. His speculative campaign attracted to 
him a large and dangerous following, and his 
views of values were based more upon optim- 
ism than reason. He was honest, but he was 
mistaken. 

The death of a great financier is always con- 
sidered for its probable market effect, which 
must, of course, be measured by the actual re- 
sult. The probability of such an event acting 
as a fillip to an already over-strained condition 
may be eliminated on the theory that in such 
cases they become excuses, not causes. It is 
not reasonable to believe that the removal of 
any one man from the financial map will be 
followed by any sustained depression. The 
affairs of such men almost invariably revert to 



44 THE PITFALLS OF SPECULATION 

good hands by direct succession, and the popu- 
lar fallacy about rich men's sons is being con- 
tinually disproved by such men as the Vander- 
bilts, Rockefellers, and Ogden Armour. 

Nor is the death of a rich man always an un- 
mixed evil. Jay Gould's death was, if any- 
thing, a boon to the speculative world. He was 
a trickster and a wrecker. Even, in the event 
of a great financier dying intestate his hold- 
ings would quickly find a resting place in 
strong hands. 

The danger of wide-spread epidemic has 
always been regarded as a bear point, and were 
it not for the fact that the advance of science 
and the improvement in sanitary conditions 
now invariably confines even the most con- 
tagious and virulent diseases to limited areas, 
the devastations of a plague might be seriously 
regarded. As it is, the probability of any ma- 
terial damage from such a source is remote, 
and the bears, wont to welcome with open 
arms, ruin, devastation and death, have almost 
discarded them as weapons.* 

The most serious of all events classed as 
accidents, is war, with its heavy entail and 

♦In the cholera scare of 1892, when the "yellow flag," in- 
dicating cholera on board, was shown outside the New York 
harbor, an excited bear rushed upon the floor of the Exchange, 
shouting, "Hurrah, hurrah, the cholera is here." He was 
suspended. 



ACCIDENTS 45 

general disruption of affairs. That our coun- 
try will not be plunged into a disastrous or 
prolonged war must be taken on faith, and the 
struggles of other nations, in which we are not 
involved, is productive of more good than evil ; 
as, while it may bring about the forced selling 
of some of our securities held abroad, it also 
places the United States in the position of a 
huckster, and makes a market for our products 
at materially higher prices, which prosperous 
condition must be reflected in all lines of busi- 
ness. No better example of this could be given 
than the recent struggle between Russia and 
Japan. 

The contention is therefore made that while 
accident is frequently made the excuse for 
speculative declines, it is seldom the cause, and 
that if conditions are sound and prices low, any 
sharp decline brought about by unforseen hap- 
penings creates opportunities which would 
otherwise not have existed. On the occasion 
of public fright at such stages, it is frequently 
the case that great men come to the "assist- 
ance" of the market, and buy stocks heavily, 
(when they are low enough), and are hailed as 
public benefactors. That such purchases are 
made from purely philanthropic motives is, to 
say the least, doubtful. 



46 THE PITFALLS OF SPECULATION 

The speculator, therefore, who has mapped 
out a well-formed plan of operation, can afford 
to ignore the probability, or possibility of acci- 
dent, except to provide for any sudden flurry 
occasioned by such causes; or, if an active 
operator, may sometimes take advantage of un- 
reasonable fright and apprehension to replace, 
or increase his holdings. 

There is no gainsaying the fact that a seri- 
ous accident or event is possible; but to be 
effective it must be in the nature of a far- 
reaching disaster, and may be viewed by the 
trader with about the same degree of appre- 
hension as he views the danger of being struck 
by lightning in his daily walks. 

NOTE. — In referring to the probable influ- 
ence of warfare in the preceding chapter 
(which stands as it was written ten years ago) 
it was stated that no better example could be 
offered than the struggle between Russia and 
Japan, which added greatly to our wealth. But 
we have since then had a much better and 
more favorable example in the European war. 
However, the basic principle is the same in 
both cases. The outcome of the European 
struggle has faithfully supported the theory 
expounded. 



VI 

Business Methods In Speculation 

FEW men embark in a business pursuit of 
any kind without a careful examination 
of the prospects and environments of 
their ventures. If a business, or an interest in 
a business ; is to be purchased, the past, present 
and probable future of that business are care- 
fully examined. The assets and liabilities are 
compared, the record of past sales and profits 
are considered, and the probable future of the 
community, or territory from which the busi- 
ness draws its revenue, is given particular at- 
tention, and also, the danger of a decimation of 
profits through competition is considered. The 
character of the individuals concerned as part- 
ners or managers is weighed, and if found 
wanting, the proposition is discarded, as con- 
fidence between men is the foundation of all 
successful combinations. 

Neither does the prospective purchaser enter 
his field without some special education for the 
business in hand, or at least not without a 

47 



48 THE PITFALLS OF SPECULATION 

determination to watch and learn daily some- 
thing of the technicalities of his enterprise. 

These simple facts are recognized the world 
over as merely plain, sensible precautions 
adopted by all business men in all businesses- 
all except one — the widely patronized business 
of speculation. 

This disregard of recognized business rules 
and laws is caused largely by the fact that the 
multiplicity of speculative properties with their 
large capitalizations stagger the ordinary mind, 
and lead a man into the error of considering 
himself incapable of grappling with so great a 
problem, and partly by a misplaced confidence 
in the expressed belief of others. 

The opinions of brokers are given a degree 
of Credence to which they are seldom entitled, 
for, sad to relate, the lack of study and method 
is almost as prevalent behind the office railing 
as outside of it, in addition to which the desire 
to make commissions frequently leads the 
broker to an expression of encouraging views 
running parallel with the ideas of the client, 
whether such views are sincere or not. 

The emphatic opinions of friends and ac- 
quaintances are also greatly over-rated at 
times, especially if the advisor has been fortu- 
nate in his recent ventures, which fact alone is 



BUSINESS METHODS IN SPECULATION 49 

a dangerous and insufficient guide. This will- 
ingness to accept the alleged thinking and 
knowledge of others frequently results in al- 
most total elimination of thought and knowl- 
edge as a basis of operation. It is doubtful if 
a single case of sustained success in specu- 
lative ventures can be pointed out that was 
not founded upon individual study and investi- 
gation. 

The idea that large properties cannot be in- 
vestigated intelligently is a mistake. Every 
standard listed security must, under the rules 
of a well conducted exchange, offer to the 
public every facility for such investigation. 
The size of a property is only a matter of de- 
gree, a multiplication of what represents and 
belongs to a single share of stock; or, per 
contra, the value of one share of stock is a 
division of the whole. 

Facts and figures as to assets, earning 
capacity, territory and past history are easily 
obtainable, and the value of the deductions 
resulting from the thorough and painstaking 
scrutiny of a property is to be gauged only by 
individual capacity for clear thinking, stripped 
of foolish credulity and pig-headed prejudice. 

The advantages of choosing for operations 



50 THE PITFALLS OF SPECULATION 

the standard properties listed upon the New 
York Stock Exchange are manifold. There is 
always a market for these properties, which is 
not true of wild-cat securities; they are ad- 
mitted to the benefits of the exchange on de- 
monstrated merits, and under inflexible rules. 
True, a few bad properties have made their 
way into the exchange, but they have been the 
exception, not the rule. 

The governors of the exchange are men of 
unquestioned business integrity and honor, and 
exercise every precaution to exclude undesir- 
able stocks. 

It may be contended that the public has been 
dumped, time and again by the fluctuations of 
listed stocks, which is exactly true; but that 
has been the fault of public error, and not of 
the rules of the stock exchange, nor lack of 
merit in the properties themselves. 

The man who begins his investigations as to 
the actual value of a listed property, therefore 
begins with one which holds a high place in 
the business world, and which certainly has 
some value. It is his business, therefore, to 
estimate carefully this value, and upon the re- 
sult to base his operations.* This knowledge of 



♦The writer's views as to the best method of making such 
an investigation will appear in a succeeding chapter. 



BUSINESS METHODS IN SPECULATION 51 

an approximate valuation will prove of great 
importance, and will materially aid the pos- 
sessor, and prevent him from undue exhila- 
ration or depression. 

He may reasonably argue that all general 
depression will be followed by improvement, 
and that every bubble of inflation will be 
pricked. The United States will take care of 
itself and all of its good properties. 

Matters of moment bearing upon his particu- 
lar property will, of course, be weighed care- 
fully, and, if of sufficient importance, may 
necessitate the changing of his basis of valu- 
ation, either to a higher or a lower level, but 
this will be done carefully and slowly. 

One thing the investigator may safely con- 
sider in his favor, and that one thing is of high 
importance : that the good properties of a new 
country are certain to gradually advance in 
value, with a tendency to restricted fluctuations 
until final absorption takes place. 

This fact is easily explained: a new country 
offers in the sudden development of its virgin 
resources opportunities which render fair per- 
centage returns unattractive, and speculative, 
or even investment capital seeks these chan- 
nels. But as these opportunities are gradually 
restricted by development, money seeks the 



52 THE PITFALLS OF SPECULATION 

dividend paying properties which will yield 
perpetual returns. 

The man who speculates in a business-like 
manner will at once see the necessity of en- 
tirely eliminating abnormal possibilities and 
rashness from his plan of operation. The dif- 
ference between expecting from the market 
what is reasonable, and expecting too much; 
and between buying what can be reasonably 
protected, and even increased, and plunging, 
is exactly the difference between success and 
failure. 

He who buys one thousand shares of stock 
on a total capital of ten thousand dollars is 
ruined before he begins trading. He may suc- 
ceed once, twice, or twenty times, but his ulti- 
mate failure is as certain as death. 

Many men with sound ideas, and whose ven- 
tures have proved ultimately the correctness 
of their views, have, by the one fault of over- 
trading, become paupers, when, with business 
methods, they might have become millionaires. 

It is one of the many strange facts about the 
great field of opportunity called speculation, 
that men who consider ten per cent, a good 
return on capital in ordinary business are 
wholly dissatisfied with one hundred per cent, 
in a speculative venture. 



BUSINESS METHODS IN SPECULATION 53 

The business man in speculation will find it 
expedient to divorce himself from the alluring 
attractions of the ticker itself. Many traders 
whose long range views of values and ap- 
proaching conditions are good, get their noses 
so close to the ticker as to shut out the true 
perspective. They deceive themselves into the 
belief that they are keeping well posted by 
haunting the brokerage offices and following 
the mass of good, bad and indifferent gossip, 
conflicting opinions, canards, and predictions, 
as well as being swayed by the innumerable 
flurries which occur almost daily, and are al- 
ways accompanied by an excuse. For a man 
is human, and no matter how phlegmatic by 
nature or cultivation, is more or less moved 
by these pernicious influences. 

Anything worthy of consideration may bet- 
ter be considered in cold blood, than in the 
active time and place of speculation, and if 
commitments have been intelligently made and 
provided for, propinquity to the ticker will far 
oftener prove a detriment than an aid to profits. 
There are no doubt many professional scalpers, 
whose business is the chasing of fractions, who 
watch the slightest variation in quotations, 
and by so doing make some money — a great 
deal less, by the way, than is popularly sup- 



54 THE PITFALLS OF SPECULATION 

posed — and who find their constant presence 
at the ticker a necessity to their particular 
scheme of operation, but these articles are not 
written for their benefit. 

The time spent in gathering a bewildering 
mass of false impressions, so untrustworthy as 
to be ridiculous, and so numerous as to be con- 
fusing, can be much more profitably spent as 
every really successful operator spends his 
time, in study and sound reasoning. 

The choosing of a broker is important, finan- 
cial responsibility and personal integrity being 
the first considerations. Brokers who offer re- 
ductions from the fixed standard of interest 
and commissions should be regarded with sus- 
picion; such advantages are usually dearly 
purchased. Standard charges are not un- 
reasonably high, and are not to be considered 
a drawback if general methods are correct. 

A good broker may also frequently aid in 
the forming of opinions, or in the confirmation 
of opinions already formed; but as every 
trader, to succeed, must do his own thinking, 
this is not of so much importance as is the 
assurance of stability and probity. It is cold 
comfort to see one's carefully figured deduc- 
tions confirmed, and then see the results vanish 



BUSINESS METHODS IN SPECULATION 55 

in the failure of an unreliable house, and yet 
this same event occurs again and again. 

Summing up, the man who speculates in a 
business-like way trades only in standard prop- 
erties with whose history, physical condition, 
earnings and prospects he has thoroughly 
familiarized himself; forms for himself a care- 
ful estimate of normal value and uses this 
value as a gauge by which to decide when 
prices are too low and too high ; takes into con- 
sideration also the technical condition of the 
market, and does not embark with bad com- 
pany, even at low prices ; is not misled by the 
thrills of inflation, or the chills of depression; 
operates, not for the purpose of gathering a 
small profit from many transactions, but to 
gather a large profit from a few; trades with 
responsible middle-men, and, above all things, 
is patient. In short, he maps out for himself 
an intelligent and well-founded plan of oper- 
ation, contemplating all that may occur, and 
having mapped it out, follows it. 

Very few speculate in this manner, and — 
very few succeed. 



VII 

Analyzing Basic Conditions 

QilNCE the foregoing chapter was first 
^ published many inquiries have been re- 
ceived, asking for instructions as to the 
simplest methods of judging a sound or un- 
sound basic situation. An exhaustive discus- 
sion of the subject is forbidden by the limita- 
tions of space, but a few suggestions may 
prove of value to the reader. 

While it is true that many things require 
consideration, and it is not safe to relax vigi- 
lance in scrutinizing minor factors, a great deal 
of redundant and unnecessary work is done by 
zealous students. They either duplicate their 
work by examining factors which are inter- 
dependent or collateral, or go at the problem 
backward by uncovering some unimportant 
ingredient and tracing it laboriously to the 
root, instead of finding the root influence first 
and later giving to the branches such attention 
as they may deserve. Credit and money con- 
ditions, bank clearings, average return on 
money invested in sound securities, and a few 
other dominant factors, are usually sufficient 
guides or are at least sufficient to direct atten- 

57 



58 THE PITFALLS OF SPECULATION 

tion to divergences, or to extraordinary influ- 
ences which may merit examination. It goes 
without saying that to this broad perspective 
we must add the more trying and time-con- 
suming practice of examining the individual 
status of each security which we may own or 
which we contemplate owning. A general per- 
spective loses much of its value unless backed 
up by painstaking discrimination in the matter 
of selection of securities. 

In their studies of the causes of crises and 
periods of depression, several of the leading 
economists have pointed out a number of eas- 
ily recognizable phenomena which precede 
and indicate the appearance of such periods. 
There is very little divergence of opinion as to 
the character of such indicia. They are mat- 
ters of precedent and record — after-event wis- 
dom. As to the basic causes of crises, how- 
ever, the theories are numerous and diver- 
gent ranging all the way from sun-spots to 
personal extravagance. 

The preceding indications of trouble are 
placed under seven heads by Burton, in his 
book, "Crises and Depressions," and these 
rules practically represent the composite view 
of students of economics. They are as follows : 

Preceding Indications of Crises, 
"i. An increase in prices, first, of special 



ANALYZING BASIC CONDITIONS 59 

commodities, then in a lesser degree, of com- 
modities generally, and later of real estate, 
both improved and unimproved. 

"2. Increased activity of established enter- 
prises, and the formation of many new ones, 
especially those which provide for increased 
production or improved methods, such as fac- 
tories and furnaces, railways and shops, all re- 
quiring a change of circulating to fixed capital. 

"3. An active demand for loans at slightly 
higher rates of interest. 

"4. The general employment of labor at in- 
creasing or well-sustained wages. 

"5. Increasing extravagance in private and 
public expenditure. 

"6. The development of a mania for specu- 
lation, attended by dishonest methods in busi- 
ness and the gullibility of many investors. 

"7. Lastly, a great expansion of discounts 
and loans, and a resulting rise in the rate of 
interest, also a material increase in wages, at- 
tended by frequent strikes, and by difficulty in 
obtaining a sufficient number of laborers to 
meet the demand." 

Unfortunately, neither Mr. Burton nor the 
other writers offer a specific formula of the 
reverse set of indications, i. e.: those preced- 
ing a period of prosperity, Probably they as- 
sume that a contraposition of the symptoms 
is understood. It may be illuminating to para- 



60 THE PITFALLS OF SPECULATION 

phrase these rules in order to make them apply 
more specifically to the movements of security 
prices and also to attempt to construct an in- 
verted or transposed set of preceding indica- 
tions of a boom. This the writer will under- 
take. 

Preceding Indications of a Major Decline in 
Security Prices, 
i. High and rising prices of securities, ac- 
companied by heavy general business. 

2. Expanded credit conditions, showing the 
full or over-employment of money. Also high 
rates for call and time money. 

3. Large net earnings of railroad and indus- 
trial corporations, together with increased 
dividends and extra distributions. 

4. A low rate of return on money invested. 

5. Large transactions in securities, with 
public excitement and enthusiasm. 

6. Record-breaking bank clearings, both in 
New York and outside of New York. 

7. A wide and active range of security prices 
with alternate sharp declines and rapid recov- 
eries. This is the final period of manipula- 
tion, during which the public is kept interested 
and insiders are unloading. 

Preceding Indications of a Major Advance. 
1. Low and usually moderately declining se- 
curity prices, accompanied by much irregular- 



ANALYZING BASIC CONDITIONS 61 

ity in the price movements of specific stocks. 
General business dull. 

2. Sound or easy credit conditions and low 
rates for call and time funds, indicating much 
unemployed money. 

3. Low railroad and industrial earnings. 
Some decreased dividends, receiverships and 
reorganizations. 

4. A high rate of return on money invested. 

5. Small transactions in securities. Very lit- 
tle outside speculation. 

6. Bank clearings falling in New York and 
not making much increase outside. The New 
York clearings reflect the absence of heavy 
Stock Exchange transactions or new financ- 
ing. Clearings outside of New York reflect 
general business activity and should naturally 
show an increase in volume from year to year. 

7. A narrow and irregular stock market, 
with a considerable period of backing and fill- 
ing. Public apathetic and traders bearish. Far- 
sighted interests take all offerings. If the mar- 
ket is in the final stages of liquidation bad news 
of any kind has no effect. This is the period 
of accumulation. 

The above is the general prescription. The 
simplest means of carrying on an examina- 
tion of the influences which are always more 
or less submerged will now be suggested : 



62 THE PITFALLS OF SPECULATION 

First — Credit Conditions. 

The credit situation is most simply shown 
by the relation of loans to deposits and specie 
to loans. If loans greatly exceed deposits, 
that is to say, if the banks are not only loaning 
all their deposits but part of their capital and 
undivided profits, the credit situation is more 
or less strained. If, at the same time, the per- 
centage of specie to loans is very low the situ- 
ation is obviously worse. 

Second — Price of Money. 

If money rates are high and rising, as is usu- 
ally the case when the credit situation is un- 
sound, liquidation of securities is sure to occur. 
The banks, needing funds, or able to employ 
them at higher rates, call in their collateral 
loans and this brings about selling of secur- 
ities. 

Third — Volume of business on the Stock 
Exchange. 

Dulness and small transactions are always 
present just before a great advance. Activity 
and public enthusiasm are always present just 
preceding a great decline. 

Fourth — Bank Clearings. 

Bank Clearings are the best barometer of 
business activity. As stated heretofore, the 
clearings in New York are more representative 
of financial operations than of trade, while the 
clearings outside New York give us a fair idea 



ANALYZING BASIC CONDITIONS 63 

of general business activity in the country at 
large. 

Fifth — Average Stock Prices. 

It makes a great deal of difference whether 
stock prices are high or low when certain good 
or bad conditions obtain. However, it is al- 
most invariably the case that the level of 
prices is at its apex when the barometers show 
the worst conditions and at its nadir when the 
best conditions obtain. This seeming paradox, 
thoroughly appreciated and understood, is of 
the utmost importance. It frequently leads to 
correct action in the face of the most alluring 
and deceptive surface indications. 

Sixth — Dividend Increases and Reductions. 

Here is another paradox. The rapid in- 
creases in dividends or the distribution of 
"melons" usually comes at the approximate 
top of a market, while the reductions and dis- 
appointments come at the bottom. This is 
because the stock market has anticipated the 
good or bad news. The same law holds good 
as to receiverships and reorganizations. These 
actually occur in greater number just before 
a market begins advancing than at any other 
time. 

Seventh — Return on Money Invested. 

When the average return on money in- 
vested in seasoned dividend-paying shares falls 
to a very low rate, the market is too high, un- 



64 THE PITFALLS OF SPECULATION 

less, indeed, numerous increases in dividends 
are to be expected. Conversely, when the re- 
turn is very high, prices are too low. This 
law needs no extended explanation. 

As an illustration and confirmation of the 
dependability of these simple barometers, let 
us examine the conditions which have existed 
at the beginning and end of the two great ad- 
vances of the last fifteen years. 

From 1900 until the latter part of 1902 there 
was a tremendous advance in security prices 
with only one serious interruption, which was 
caused by the Northern Pacific corner in May, 
1 90 1. The average prices of securities attained 
a level never before reached. In 1902 bank clear- 
ings were record-breaking both in and out of 
New York, showing heavy financing? specu- 
lation and general business. Credit conditions 
grew very bad in the latter part of the year 
and money rates were high. Net earnings were 
very large, dividends were increased, the re- 
turn on investments was low, Stock Exchange 
transactions were large and public excitement 
was at its height. The panic of 1903 followed 
on the heels of these conditions. 

In the early months of 1904 all these appear- 
ances were reversed and stocks began an ad- 
vance which carried them to a new high level. 

The period of distribution preceding the de- 
cline of 1903 covered the last quarter of 1902 



ANALYZING BASIC CONDITIONS 65 

and the period of accumulation covered the 
second quarter of 1904. The indications may 
be tabulated for convenient reference as fol- 
lows : 

Basic Conditions Preceding Decline of 1903 
and Advance of 1904. 

Last Second 

Quarter, Quarter, 

1902 1904 

Per cent of loans to deposits (avg.) . . 100.16% 94.40% 

Per cent, of specie to loans (avg.) .... 17.74% 21.85% 

Call money (avg.) 6%% 1%% 

Time money (avg.) 6% 3j^% 

Sales on N.Y. Stock Exchange (shares)49,205,853 18,468,445 

Clearings, New York +7.4% —12.6% 

Clearings, outside New York 4-5.6% — 4.3% 

Avg. price 20 Rails 120 95 

Avg. price 12 Industrials 63 48 

Dividends increased (year) 21 4 

Railroad receiverships, miles (year) . 278 744 

Return on money invested 3.75% 5.65% 

NOTES. — Credit conditions based on con- 
ditions shown by New York Clearing House 
banks, no other figures being available at reg- 
ular intervals. It is found, however, that the 
condition of the Clearing House banks is a 
good barometer of general banking conditions. 

The bank clearings in New York and outside 
of New York are given in percentages of ad- 
vance (+) or decline ( — ), as compared with 
the preceding year. 



66 THE PITFALLS OF SPECULATION 

Average prices of 20 rails and 12 industrials 
are the "Wall Street Journal's" averages. 

Return on money is based on prices and divi- 
dends of ten leading dividend-paying railroad 
stocks. 

The same notes apply to the table which 
follows : 

The period of distribution preceding the 
decline of 1907 was apparent in the last quar- 
ter of 1906. The period of accumulation cov- 
ered the first quarter of 1908. Indications were 
as follows: 

Basic Conditions Preceding Decline of 1907 
and Advance of 1908. 

Last First 

Quarter, Quarter, 

1906 1908 

Per cent, of loans to deposits (avg.) . *01.60% 98.89% 

Per eent. of specie to loans (avg.) . . . 17.60% 22.35% 

Call money (avg.) 8j^% l%% 

Time money (avg.) 7% 3j^% 

Sales on N.Y. Stock Exchange (shares)61,75 1,3 12 42,373,856 

Clearings, New York 5.5% 28% 

Clearings, outside New York 9.2% 15.1% 

Avg. price 20 Rails 135 90 

Avg. price 12 Industrials 95 62 

Dividends increased (year) 21 5 

Dividends reduced (year) 3 26 

Railroad receiverships, miles (year) . . 204 8.099 

Return on money invested 3.50% 5.95% 

An examination of the exhibits given above 
shows very distinctly that our last two great 



ANALYZING BASIC CONDITIONS 67 

declines in security prices began at a time of 
activity, heavy trading, excellent general busi- 
ness and increased dividends. There were 
plenty of warning signals, such as credit condi- 
tions, money rates and the low return on in- 
vestments, but in the general excitement the 
favorable was exploited and the unfavorable 
ignored. And the reverse of all this was true 
when the evil conditions were remedied. 

It will be observed that the decline of 1903 
amounted to 25 average points in rails and 15 
average points in industrials, and the decline 
of 1907 amounted to 45 points in rails and 33 
points in industrials. In this regard it should 
be stated that calculations do not show either 
the extreme top or extreme bottom of any 
movement. It is invariably the case that in a 
great upward or downward swing prices are 
carried beyond all reasonable limits in the final 
spasms. This is followed by a sharp and im- 
mediate reversal of a few points and then the 
period of real distribution or accumulation be- 
gins. Attention is, therefore, properly confined 
to the stages last mentioned, i. e., the period 
of backing and filling at the approximate top 
or bottom. 

We have now seen what followed the first 
set of appearances which attracted the out- 
siders to their undoing. Now look at the other 
set and see how plainly the indications point 



68 THE PITFALLS OF SPECULATION 

to a recovery. At the end of 1904 the aver- 
age price of 20 rails was 119, and 12 industrials 
70, advances during the year of 24 and 22 points 
respectively. At the end of 1908 average of 
20 rails was 120, and 12 industrials, 86, ad- 
vances of 30 and 24 points respectively. Nor 
was that the end of the recovery. In Decem- 
ber, 1905, rails were 133 and industrials 96. 
In August, 1909, rails reached 134 and indus- 
trials 99 

These indications are not ' theoretical, any 
more than are the indications set down by 
Burton and the other economists. They are 
matters of precedent applying to all such 
periods and are subject to analysis and logical 
conclusions. It must be admitted, however, 
that with all these important aids to examina- 
tion forecasting price movements is not and 
never will be an exact science. Extraneous in- 
fluences, which cannot be foreseen, such as 
wars, politics and crop prospects, sometimes 
upset or temporarily restrain the workings of 
basic conditions. It is found, however, that in 
the past such influences have usually been of 
minor importance. There is also a tendency 
to attribute market action to whatever is ob- 
vious, regardless of what the real, but sub- 
merged, causes may be. So far as the extra- 
neous influences referred to are concerned, all 
we can do is to watch developments, prospects 



ANALYZING BASIC CONDITIONS 69 

and probabilities from day to day and give 
them their proper weight and consideration. 
Crop prospects are the most important of the 
unknown factors, but we may gather comfort 
from the fact that crop failures are the excep- 
tion, not the rule. 

While it is necessary to conduct our investi- 
gations along the broadest possible lines and 
to exercise eternal vigilance in regard to shift- 
ing influences, if we permit ourselves to lose 
sight of what is basic — the real foundation, we 
make the vital error of eliminating from our 
calculations the most important equations. 

It is, of course, not necessary for the student 
to compile the ingredient calculations given 
above at the expense of his time and labor. 
All the figures can be obtained from one source 
or another at very little expense. 

In conclusion, it is proper to state most em- 
phatically that the student of basic conditions 
who begins or pursues his labors without a rea- 
sonable grasp of the principles of political econ- 
omy, will waste much time and thought and 
will certainly labor under a great handicap. 
The misleading term "political economy" car- 
ries to the lay mind an idea of great profun- 
dity and the necessity of arduous research and 
study. If this branch of economics had been 
called "the science of wealth," which is ex- 



70 THE PITFALLS OF SPECULATION 

actly what it is, its principles would be more 
widely sought and assimilated. 

It is not necessary to enter upon an extended 
or exhaustive course of reading or study in or- 
der to obtain a working knowledge of the fun- 
damental principles of political economy. 
These may be found condensed in simple form 
in a single text-book and, once they are under- 
stood, a great deal that is vague and mystify- 
ing will disappear. As an illustration of this 
let us take one case in point. 

We hear much talk, from time to time, of 
the creation or destruction of capital. Yet a 
vast majority of people do not even appear to 
know what capital is. They constantly confuse 
money, wealth and capital, and arrive at 
astounding conclusions. 

There is no divergence of opinion among 
economists from Adam Smith down to the 
present day as to the definition of capital. 
Wealth is the accumulation of past labor. Cap- 
ital is that part of wealth which is used in re- 
production. To paraphrase a familiar example, 
if a man has wealth to the amount of $100,000 
and invests $75,000 in a palatial residence, 
drawing his income from $25,000 invested in a 
factory, his capital is $25,000 and no more. Re- 
verse the illustration and his wealth is still 
$100,000, while his capital is $75,000. No part 
of the wealth invested in a residence is capital 



ANALYZING BASIC CONDITIONS 71 

further than what is actually necessary to ade- 
quate shelter. The rest is luxury — unproduc- 
tive wealth. 

Again, we hear of the tremendous amount of 
capital destroyed, say by the use of munitions 
of war. "A shell costs $100," says the incom- 
petent observer, "when you fire it $100 of cap- 
ital is destroyed." That is not true; the cost 
of the shell has nothing to do with the matter. 
The profits gained by the numerous people 
providing the ingredients or fabricating the 
completed article are not destroyed, they rep- 
resent nothing but a shifting of circulating cap- 
ital from one place to another. The actual cap- 
ital loss is confined to the initial basic value of 
the ingredients destroyed by the explosion. 

There is nothing obscure or recondite in 
this, nor is there in any other phase of the sub- 
ject when we strip away the multitude of 
words in which economic discussions are usu- 
ally clothed, and get down to comprehensive 
facts. 



VIII 

Market Technicalities 

THE study of technicalities, of which little 
is generally known, and about which 
nothing has been written, is of great im- 
portance to the speculator, and particularly to 
the active trader. 

The two most glaring, as well as the most 
important technical appearances which mark 
the top and bottom of a speculative cycle, have 
been commented on in a previous chapter ; they 
consist of dullness and stagnation at the bot- 
tom of a movement, and crazy recklessness 
and universal participation at the other ex- 
treme. 

In addition to the facts that have already 
been presented in regard to these two extremes, 
the following rule may be set down : 

It is practically impossible for an over- 
bought market to advance materially, or for 
an over-sold market to decline materially. 

This seemingly radical statement is so well 
based as to be operative regardless of actual 

73 



74 THE PITFALLS OF SPECULATION 

values. That is to say, if a certain stock is sell- 
ing at sixty and is intrinsically worth' par, it is 
very unlikely that it will reach par while there 
exists a general marginal participation for the 
long account; and on the other hand, a stock 
which is selling at par and is worth only sixty, 
will not decline if there is a heavy short in- 
terest in it. 

These statements may at first blush seem 
opposed to the previous contention that any 
security must eventually seek its correct level; 
not so, for the fact is that correct levels will 
finally be reached, but not until the preponder- 
ance of participating opinion has been equal- 
ized; or, what is more common, exactly re- 
versed. 

There have been many cases where the bet- 
ter class of traders have made a strong favor- 
ite of a certain security, and have been wholly 
unable to account for its dullness or depression. 
Frequently their original deductions have been 
correct, but after long and patient waiting for 
the price of the stock to readjust itself to what 
they correctly considered its true valuation, 
they have withdrawn in disgust, or have even 
allowed themselves to believe that there must 
be some concealed rottenness about the affairs 



MARKET TECHNICALITIES 75 

of the corporation which they are unable to 
ferret out. 

The analysis of this state of affairs is neither 
profound nor difficult. First, and most import- 
ant, is the fact that the buying power which is 
necessary to any marked advance is absent. 
The public having made a favorite of the stock, 
has loaded up and is waiting for an advance. 
The public buying is completed, and no matter 
how inviting the proposition may be, so far as 
intrinsic merit goes, the big men will not buy 
while this public interest exists. They will not 
participate in a deal which contemplates a hoi 
polloi partnership, and aside from this, they 
are aware of the fact that they can certainly 
purchase cheaper in time if the present holders 
are left to their own devices. 

In order to pursue any deal looking to an 
advance in the security in question, the pro- 
fessionals realize that should they enter the 
lists now they would be working for public 
benefit. They must not only buy in a re- 
stricted market at advancing prices, but must 
be prepared to take over at higher prices the 
present holdings of the public. 

This is not the method used by great specu- 
lators; they do not bid for and assist the public 
in its speculative affairs, but accept at low 



76 THE PITFALLS OF SPECULATION 

prices what the public is throwing away. The 
professional element therefore cannot be 
counted on to forward prices. They will wait. 

Meanwhile the numerous friends of the 
stock sit and twiddle their thumbs and wonder 
what in the world is the matter. 

This state of affairs, it is evident, would cure 
itself in time through the certain and unstop- 
pable assertion of intrinsic merit, but the re- 
quired time will not be granted by the im- 
patient holders. Something entirely different 
(and more rapid) will occur. The impatient 
public will throw over its stocks in disgust one 
by one, and each decline will confirm others in 
the belief that there is "something rotten" in 
the stock. It being impossible to uncover or 
point out anything detrimental, something is 
invented, and the well-meant plans of the hold- 
ers end in a general decline, and after a time, 
in the hands of people who know both values 
and methods, the stock is first absorbed, then 
galvanized into activity, and finally hippo- 
dromed back into public hands at prices higher 
than they had first figured as its value. 

The statements made above are not calcu- 
lated to encourage the public trader. It cer- 
tainly looks as if he had a hard row to hoe when 
even intrinsic valuation, correctly estimated, 



MARKET TECHNICALITIES 77 

will not always produce satisfactory results; 
but the knowledge of this important technical 
condition and its cause and effect will prove 
of the highest value to the trader. He may 
reason as follows : I have figured and estimated 
the value of this security and find it to be too 
low, but unfortunately it is a public favorite. 
Its cheapness is so apparent as to attract to it 
a large following incapable of either patient 
waiting or sustained action. The widespread 
nature of these holdings, and the character of 
the holders render any concerted action for a 
more or less manipulated advance out of the 
question. On the other hand, the holders who 
now believe in the stock will daily grow more 
impatient at its torpidity, and will eventually 
begin to liquidate. This will be followed by 
numerous canards inimical to its price, and the 
stock will, at the bottom prices, be friendless so 
far as the public is concerned. When this con- 
summation is reached, the stock will rest in the 
hands of men who possess all the qualifications 
of speculative success — patience, money and a 
full knowledge of how to start the machinery 
of an advance at the right time. 

In following this reasoning the trader is 
doing exactly what the great inside interests 
do, and if he refrains from purchasing, even at 



78 THE PITFALLS OF SPECULATION 

low prices, when a security is too popular, he 
may rest assured that he will be able to pur- 
chase more cheaply in time. The chances are 
a hundred to one that no safe or material ad- 
vance will occur under such conditions. The 
amateurs and the professionals cannot win on 
the same side in a speculative deal. It is the 
survival of the fittest, and the trader can soon 
decide with which side he wishes to identify 
himself. On the one hand are narrow margins, 
over-speculation, absolute lack of method; on 
the other, wealth, knowledge, concentration, 
and organization. 

These are cold, hard facts and require only 
the directed exercise of good reasoning to be 
taken advantage of. 

The same rule in inverse ratio applies to an 
oversold market, except that the danger to the 
seller is even greater. The professionals, a 
purely speculative party with whom the greater 
lights of speculation do not hesitate to ally 
themselves occasionally, are always on the 
lookout for an over-sold market, and the 
squeeze they sometimes administer to a wide- 
spread short interest is very severe. 

There is nothing in the speculative world 
more hazardous than short-selling in a numer- 
ous company. 



MARKET TECHNICALITIES 79 

In digesting the above statements, the ques- 
tion naturally arises : "How may a bad techni- 
cal condition be recognized?" This is not so 
difficult as it might appear. 

It is first necessary to lay aside any precon- 
ceived personal opinions and prejudices bear- 
ing on the stock in question, and conduct in- 
quiries unhampered by "the wish that is father 
to the thought" 

The published opinions and interviews in the 
newspapers, the expression of opinions among 
the speculators generally, and if possible, a 
frank inquiry from a friend at court, viz.: a 
broker who has means of knowing whether or 
not a widely scattered and considerable long 
or short interest exists — will usually prove 
sufficient 

A successful Western trader for many years 
gained this information from the books of a 
single large private wire house in Chicago, and 
claimed that he found the method an infallible 
barometer, and that he would frequently find 
every office of the company's system on one 
side of a stock, with scarcely a single trade on 
the other side. This man, whose word there 
is no reason to doubt, made the interesting 
statement that at the approximate high prices 
of Steel Preferred and Amalgamated Copper 



80 THE PITFALLS OF SPECULATION 

he found that the long account in these two 
stocks, representing the operations of a large 
and indiscriminate public trade, exceeded those 
of all other stocks combined, without a single 
short trade, and that later when Steel Pre- 
ferred had sold below fifty and started on its 
upward road, there was not one of the hundred 
offices in the system whose customers were not 
short of the stock, while the long account was 
limited to a few scattered trades. 

Such a state of affairs is astonishing, and 
were it not for a realization of the loss and suf- 
fering brought about by such widespread folly, 
it would be laughable. 

The wide general swing of a stock market 
from high to low prices is marked by an almost 
unvarying set of extraneous appearances which 
may be used to advantage by the observant 
trader. 

The bottom of the cycle is marked by dull- 
ness and a sawing back and forth in narrow 
limits, with general sympathizing in the entire 
list. The successful large interests are ac- 
cumulating stocks by their time honored 
method of picking up offerings and bidding for 
nothing. When this extended period of tor- 
pidity has left the public sufficiently bare of 



MARKET TECHNICALITIES 81 

stocks, and has also created distrust and pessi- 
mism, the advance begins. 

The beginning of a bull period is almost al- 
ways marked by the bidding up of a single 
stock, and is followed by the picking up of one 
stock after another until the entire list of 
values has been materially advanced. There 
is a hazy public idea that a bull movement is 
accompanied by a general advance which ex- 
tends to all active securities. This is not shown 
by any precedent, but on the other hand the 
culmination of a bull market is marked by just 
such a general advance. This may be ex- 
plained by the statement that the genuine and 
intermediate advance from low prices to the 
approximate top is more or less assisted and 
engineered by the inside factors, who, however 
well fortified in organization and funds, would 
not be guilty of endangering themselves, (a la 
public), by attempting too much at once. 
These interests, therefore, concentrate efforts 
and capital, and lift their stocks one at a time, 
probably returning to the first security in time, 
and again furthering their favorites in rotation. 
This is the one and only stage of a market in 
which a considerable number of public traders 
make money, for the appearance of one stock 
after another advancing sharply is so glaring 



82 THE PITFALLS OF SPECULATION 

that the more or less sophisticated trader learns 
to recognize the appearance, and to buy a stock 
the minute he sees it "start," or develop sud- 
den activity. This period is the brief and 
golden time for the trading element, but alas, 
they either over-speculate so rashly that the 
first natural reaction or engineered shake-out 
lands them bottom side up, or they absolutely 
refuse to recognize that there is a top to a 
movement, and are caught with a large line at 
the highest prices. 

As has been stated, the actual culmination is 
usually marked by a general advance, which 
means that the public has entered the lists in 
force, and are buying any thing at any price. 
This is the exact condition for which the in- 
siders have worked and waited — a broad and 
general market for their holdings. 

Another public idea is that in the course of 
a bull market from one extreme to the other 
there are numerous setbacks and shake-outs. 
There is nothing in history to show that this 
view is correct; such declines are limited to one 
or two breaks of importance during the pro- 
gress of the entire cycle. This mistake of look- 
ing for repeated reactions of importance is an- 
other factor which works against the public, 
for, having seen one or two shake-outs follow- 



MARKET TECHNICALITIES 83 

ed by a continuation of the advance, they look 
for an indefinite repetition of such action, and 
do not recognize the fact that there will even- 
tually be a decline with no subsequent advance. 

The question at once asks itself : "How may 
the top of the market be discerned, and the 
dangers of the eleventh hour be avoided?** 
The answer is more or less complex. 

It is, of course, necessary above all things to 
revert to the estimated and fixed value of the 
stocks traded in and to find out how much 
above this normal point the securities are sell- 
ing. This done, common sense, plus prudence, 
and minus piggishness, may determine the 
question and dictate the time for liquidation. 
This action, however, once decided upon must 
be adhered to with great rigidity, for thous- 
ands of traders who thus take time by the fore- 
lock have been dissatisfied afterwards by seeing 
a still greater advance in which they had no 
interests, and through greed and impatience 
have re-entered the lists at a most inopportune 
time. 

The trader who realizes his profits, and sees 
a further advance follow his own withdrawal 
from the market, may console himself with the 
fact that he has made and secured a profit; 
that trying to guess the exact extreme of a 



84 THE PITFALLS OF SPECULATION 

cycle is hazardous, and that the advance which 
followed his withdrawal is unsound, being 
founded on speculation rather than valuation. 

But this is a digression from the technical 
phase of the matter. So far as it is possible to 
judge the culmination of a speculative cam- 
paign by extraneous appearances, it may be 
said that a long period of backing and filling, 
a swinging back and forth of prices at the 
approximate high level marks the beginning of 
the end. This is occasioned by the following 
facts : 

The definition of the "top" of a market is 
that point at which the great traders have al- 
most in unison decided to unload, and per 
contra, the public has reached its highest de- 
gree of enthusiasm.. At the beginning of this 
period the insiders possess an enormous ag- 
gregate of stocks which must be sold in such 
a manner as not to break the market. This 
operation will take weeks, or even months to 
accomplish, as any precipitate selling would 
be disastrous. The wise element, therefore, 
sells all the market will absorb without any 
severe decline, and ceases selling, or even takes 
the buying side at the first appearance of "soft- 
ness." In short they do all they can to main- 
tain a good feeling and high prices, at the same 



MARKET TECHNICALITIES 85 

time parting with securities as rapidly as pos- 
sible. 

This statement may convey the impression 
that the shrewd speculators act in unison. This 
is true, but not necessarily in the sense that 
there is any preconceived arrangement between 
them.. The unison is more or less unconscious, 
and is founded on the fact that there are only 
two sides to the market — the right side and the 
wrong side, and that those of the speculative 
world who have sufficient wisdom and experi- 
ence to know what is right are working to the 
same end, while all the inexperienced or un- 
thinking horde are working on theories dia- 
metrically opposed to reason or even proba- 
bility. 

A careful perusal of the above statements 
will bring out the following stages as the ap- 
pearance of a speculative cycle : 

First, a long period of dullness, then the 
rocketing of one stock after another until the 
entire list has been greatly advanced, one or two 
shake-outs (always accompanied by specious 
excuses), a renewal of the advance, and finally 
general participation and a long period of "see- 
sawing." These, so far as precedent goes, are 
the earmarks of a bull period, and may be ex- 
actly reversed in a long decline, except that in 



86 THE PITFALLS OF SPECULATION 

declines the general list is more greatly af- 
fected; that is to say, the whole list crumbles 
at once. 

Aside from the fundamental principles con- 
sidered above there are numerous minor tech- 
nicalities which are of value to active traders, 
but are dangerous and not wholly dependable. 
For instance, the appearance of strength and 
heavy buying in a certain security in a low and 
weak market is almost invariably followed by 
a decided advance in that particular stock. 
The analogy of this feature is that this un- 
natural moving against the current shows 
heavy accumulation for some reason which 
will probably be developed later. But such an 
appearance in a high market might mean 
exactly the reverse, as one stock may be bid 
up sharply to permit of liquidation in a dozen 
others under cover of the sympathetic good 
feeling engendered by the isolated advance. 

The minor technicalities are of use only to 
experienced traders who have every facility for 
acting upon them, and to enlarge upon them in 
a work of this character would be to run the 
risk of being misunderstood, or even of making 
statements which might be misleading. In 
view of this fact, and also as they are not of 



MARKET TECHNICALITIES 87 

primary importance, any discussion of them 
is omitted. 

If the idea has been conveyed in the above 
statements that technical conditions or appear- 
ances may be made the sole groundwork of 
speculative operations, let the impression be at 
once corrected. That these appearances and 
conditions exist, and that they can be made 
valuable by correct application there is no 
doubt. 

Every affair of life is preceded by certain 
signs, and "coming events cast their shadows 
before" in the stock market as well as in other 
affairs. But these appearances should be made 
use of as valuable adjuncts to more solidly 
formed opinions; as a confirmation of judg- 
ment more tangibly adduced, or as warnings 
of possible danger. 

Care has been taken to present nothing in 
these pages which cannot be analyzed and ex- 
plained, and while the statements made are 
confirmed by both logic and precedent, they 
may be easily contorted or abused. 



IX 

Tips 

fllHiE tip may be briefly described as il- 
■*■ logical. 

In considering this statement the di- 
viding line between tips and information must 
be clearly drawn, for one is frequently found 
masquerading in the habit of the other. 

The difference may be acceptably defined 
by saying that a tip is a statement that certain 
market movements will occur, with no accom- 
panying reason for such movement, and that 
information points to the expectation of move- 
ments, founded on demonstrable probabilities. 

"Smith says to buy steel," is a tip; "Smith 
says that the price of steel is low and that 
earnings are increasing," is more or less in- 
formative. In one case Smith is taken on faith 
and in the other his statement is open to in- 
vestigation and confirmation. 

The illogical character of tips will at once 
be apparent to the student of technical con- 
ditions. The large operator who contemplates 

89 



go THE PITFALLS OF SPECULATION 

a manipulated movement of any importance, 
even if such movement be based on sound rea- 
soning, jeopardizes his own chances of success 
by creating a public following. This fact is sp 
well recognized by large operators, that where 
a projected deal is discovered by too many 
people or where inside intentions have leaked 
in the form of a tip, they frequently abandon 
their plans entirely or temporarily. This point 
has already been discussed under the head of 
Technicalities, but is here reiterated as being 
pertinent to the subject. 

The promoter of a certain speculative move- 
ment who takes the public into his confidence, 
is therefore either foolhardy or insincere, and 
the ordinary man who receives a tip may be 
sure his knowledge is public property. If he 
has good reasons for believing to the contrary 
and that he is the recipient of valuable and cir- 
cumscribed information, his action of course 
depends largely on his confidence in his pa- 
tron's ability to perform what is promised. He 
simply acts on the principle that the capacity 
of his informant is superior to his own, and 
that his integrity is unquestioned. 

There are no doubt cases where manipulators 
have put into circulation a whispered word 
which they were confident would travel and be 



TIPS 91 

made the basis of considerable buying at a 
period when they wished to sell. It is related 
of the late Jay Gould that when approached by 
the pastor of a rich and fashionable New York 
Tabernacle, he whispered to him that pur- 
chases of Pacific Mail were very advisable, and 
that he, Gould, would reimburse him from his 
private purse if operations in that stock re- 
sulted in loss. When the pastor came to him 
later, deeply distressed by his large personal 
loss, Mr. Gould was as good as his word and 
promptly handed him a check to cover the de- 
ficit. "But how about my parishioners?" in- 
quired the reverend gentleman, "you placed no 
ban of secrecy upon me, and their losses are 
enormous." To which Mr. Gould replied 
calmly, "They were the people I was after/' 

Whether or not the story is true, it points 
a moral. 

It may be said that it would be possible for a 
manipulator to create public buying in a stock 
of sufficient volume to advance prices ma- 
terially, and to thus assist or accomplish his 
object. This has been done, but aside from the 
hazard to the manipulator himself through 
being in the company of an easily frightened 
herd, which he could not control, it must be 
admitted that the advance created by a certain 



92 THE PITFALLS OF SPECULATION 

amount of buying must be offset by the ensuing 
liquidation, and some one must suffer. 

The individual who imagines himself astute 
enough to evade this danger, simply flatters 
himself that he is wiser than his fellows, and 
even if he is justified in this belief, the com- 
posite result is unchanged. 

The great majority of so-called tips are, 
however, founded on nothing better than 
guesswork or pure invention. Although value- 
less, openly distributed and untraceable to any 
reliable source, they are always clothed in a 
garb of mystery and importance and are 
capable of much mischief, for there is a consid- 
erable speculative element who possess no in- 
dividual ideas of importance and who will act 
rashly on the most ill-founded advice. 

If the distribution of such advice were 
limited to charlatans and mountebanks the ef- 
fects would be greatly reduced, but many of 
the recognized brokerage concerns load their 
private wires with just such matter for the 
purpose of creating business, usually beginning 
their messages with the statement that "we 
have it from a good source" and ending with a 
ridiculous injunction to keep it dark. This 
statement is not lightly made, but is founded 
upon proven and provable fact. The statement 



TIPS 93 

does not in any way reflect upon houses which 
give out such current gossip for what it is 
worth and allow the patrons to decide for 
themselves what is wheat and what is chaff. 
Even under such circumstances the dissemin- 
ation of such news is capable of harm, but the 
distributors cannot be considered culpable. 
They are merely the purveyors of news un- 
accompanied by comment or recommendation. 
The brokerage offices of the country are 
daily visited by people who have had their im- 
agination inflamed, or their cupidity aroused 
by personal ideas or exaggerated stories of 
speculative possibilities. As they possess no 
special knowledge of speculative affairs they 
are soon lost in a maze of intricate figures, 
which not being understood, are productive of 
nothing but indecision and mental confusion. 
To this numerous class the tip at once appeals. 
Out of the mass of conflicting reports, techni- 
calities and evasions, comes the terse advice, 
"Buy Southern Pacific." Here, at last, is some- 
thing definite, and its air of being confidentially 
imparted, its transmission by telegraph from a 
distant city by a great brokerage concern, and 
its decided tone combine to lend it an import- 
ance which it in no way possesses. The man 
who wants to do something, but does not know 



94 THE PITFALLS OF SPECULATION 

what to do, acts upon it at once, and even the 
more seasoned traders who will cheerfully ad- 
mit that tips are worthless, are moved by 
advice so unimportant. 

And right here a word in regard to follow- 
ing the advice of so-called "leaders" in specu- 
lative shares or commodities. Of late this game 
of follow my leader has been more or less 
popular, especially in the cereals and in cotton. 
Sometimes the outspoken views of these self- 
constituted mentors are made public by pub- 
lished interviews or even by means of paid 
advertisements, in which emphatic opinions 
and advice are set forth. 

This form of public invitation, fathered by 
names of more or less importance or notoriety 
in speculative circles, is frequently effective in 
creating a considerable following. A little 
analytical thought will adduce the fact that the 
individual who invokes such a following must 
do so for one of two reasons: either because 
he is ignorant of the necessary ingredient of a 
successful campaign or because he wishes to 
sell what he is inviting the public to buy. Take 
your choice. 

Follow mentally the operation of such advice 
and the danger is most apparent. At the first 
sign of this public touting the men of weight 



TIPS 95 

and importance who are interested in the stock 
or commodity involved, far from welcoming 
such assistance, liquidate tjieir holdings quietly 
and step aside. They may be convinced of the 
merits of their original venture, and may even 
admit that the arguments set forth by the 
public prophet are correct, but they also know 
that his advice will invariably result in the 
commodity recommended passing from strong 
into weak hands, a fact which reduces the 
chances of profit, and increases the danger of 
decline, or even panic. 

The trader who believes in his speculative 
Daniel may see the most favorable signs for a 
time, but he may ponder on this fact: that 
however honest his prophet may be in his 
advice he will not publicly express himself as 
to a consummation or reversal of his ideas and 
hopes until he, himself, has liquidated. 

In other words, after the aimable instructor 
of the people has sold to his own followers all 
he possesses he may bluffly and candidly state 
that he has sold out, and advise his friends to 
do likewise in a market which will not now 
absorb their composite holdings. 

The danger in such a campaign as that illus- 
trated above is increased just in proportion to 
the chief promoter's influence. Each new 



96 THE PITFALLS OF SPECULATION 

public follower means a worse condition of 
affairs, and all such campaigns have finally 
terminated in disaster. The leader of these 
"come-on-boys" affairs is always a tremendous 
gambler, and usually an unscrupulous one. 

It goes without saying that tips are fre- 
quently more or less correct. If founded on 
mere guesswork, the chances of success or 
failure are equal. If the tip failed always or 
even in a large majority of cases, the evil would 
cure itself, but the percentage of satisfactory 
results is great enough to encourage its de- 
luded followers. 

So prevalent is this practice of trading on 
flimsy advice that a large number of concerns 
dignified with the title of "Information 
Bureaus" have recently been formed. As 
these concerns continue to increase in number 
and scope, it is the natural presumption that 
they find followers. These "Bureaus" make 
extravagant claims of inside information and 
advance knowledge of certain future market 
movements in the face of the fact that no man, 
great or small, knows positively the result of 
even one day's movement. The greatest specu- 
lator or manipulator in Wall Street may enter 
the arena in the morning confident of certain 
results, and leave it at night a ruined man. 



TIPS 97 

Nevertheless, claims of accurate foreknowl- 
edge by these mountebanks find a resting place 
in the minds of people otherwise intelligent. It 
is needless to add that the tipping bureau ex- 
ploits its correct guesses in glowing colors, 
and maintains a dignified silence on the subject 
of its errors. 

The man who invests in such so-called "in- 
formation" may save his money and obtain just 
as good results by basing his operations on the 
flipping of a coin. 

The concerns criticized above are in no way 
to be confounded with the reliable bureaus of 
information, of which a few are in existence. 
These latter are exactly what their names sug- 
gest. They gather, compile and distribute gen- 
eral news on speculative matters, and are use- 
ful to the active trader in presenting to him 
statistical results involving considerable labor, 
and general news which might have been over- 
looked. Such bureaus do not issue tips; they 
may allude to the existence of a certain tip, 
but only as a matter of current gossip. In this 
regard they are no more to be criticized than 
the editor of a newspaper who prints the record 
of a murder. 

So far as the efficiency of the tip is con- 
cerned as shown by precedent, it may be dis- 



g8 THE PITFALLS OF SPECULATION 

missed by again falling back on the statement 
that no sustained speculative successes are 
traceable to its use. 

The tip holds no dangers for the man who 
knows because he has taken the trouble to find 
out. If it conflicts with his well-grounded 
opinions it is discarded as being merely an un- 
supported statement, and opposed to more de- 
pendable deductions. If it accords with his 
opinions it is of no value as it is merely a be- 
lated expression of what he already knows. 
To such individuals the only tangible effect of 
which the tip is capable is its possible stimu- 
lation to investigation. 



X 

Mechanical Speculation 

ANY system or method of speculation 
which is founded on repetition, or 
which contemplates ventures founded 
entirely on certain prices being reached re- 
gardless of conditions or values, may best be 
described as mechanical. 

The use of such methods is extensive, and 
even where no set figures or forms are em- 
ployed we find the average trader continually 
harping on last month's or last year's low 
points and forming for himself a mental chart 
by which he is frequently induced to make 
commitments. 

Of these numerous mechanical methods of 
speculation only two possess sufficient merit to 
warrant serious consideration. These two ex- 
ceptions are the scale order and the stop loss 
order, both of which may be made useful under 
certain conditions. That these methods are 
frequently abused goes without saying. They 
are often made the sole basis of operations in- 

99 



ioo THE PITFALLS OF SPECULATION 

stead of adjuncts, in which case they fail of 
their purpose. 

Either method is useful only as an auxiliary 
to sound judgments already formed. So em- 
ployed they possess certain merit in that they 
permit of a fixed mechanical arrangement for 
accumulation or protection. 

The contention is here submitted that the 
scale order should be used only for the purpose 
of acquiring a line of stocks at low prices, and 
the stop loss order for the protection of profits 
after an advance. Otherwise employed they 
become useless, and in some cases even assist 
in producing loss. 

The intelligent use of the scale order con- 
templates the purchase of a certain stock or 
commodity at fixed intervals below the first 
purchase price until the total proposed pur- 
chase is completed, the mechanical principle be- 
ing that an advance of one-half the decline on 
which the purchases are made leaves the 
trader without loss, and the broader general 
principle being that the votary of the method 
at all times allows for declines due to accidents 
or errors of judgment. If such declines occur, 
he gradually acquires his line at a lower aver- 
age price for the whole. 

As an example, embodying both these prin- 



MECHANICAL SPECULATION 101 

ciples, suppose that a purchase of one thousand 
shares of Union Pacific common is contem- 
plated. The scaler begins his purchases at, 
say 100, taking one hundred shares at that 
price and entering an order to buy one hundred 
shares at fixed points below the first price, say 
for instance, at 99, 98, 97, 96, 95, 94, 93, 92 and 
91, at which last named price his purchase 
would be completed at an average price of 

95^. 

The amount to be purchased on each de- 
cline, the width of the gap between declines, 
and the point to which purchases are to be con- 
tinued are of course matters of individual deter- 
mination. The principal drawback to this 
method, which is at once apparent, is the 
danger of the original, or some intermediate 
purchase, being made at such a low point as to 
prevent the accumulation of the proposed line. 
In the extreme case of only the initial purchase 
having been possible, the trader finds himself 
with a profit on only one hundred shares of 
stock where he had intended to carry one 
thousand. 

But this argument against the merits of the 
method may be answered as follows: 

The average speculator may safely assume 
that a decline from the point he considers low 



102 THE PITFALLS OF SPECULATION 

is probable. If he happens to catch the low 
price it is an accident and not because of his 
method, whose virtues must be reserved for 
future usefulness. He may congratulate him- 
self on an unusually fortunate purchase and be 
satisfied with his comparatively small but 
quickly acquired gains. A profit is a profit, and 
the market is always with him. On the other 
hand, if he is so good a judge of the market 
that his purchase was a result of judgment 
rather than accident, he has no use for the 
scale order or any other such assistance. 

The scale order is frequently misused by 
depending too much upon inherent virtues 
which it does not possess. That is to say, it 
is made the basis of operations which are in- 
dulged in more on a belief in the merits of the 
method than on any intelligently formed 
opinion of the probable action of the stock, or 
a sufficient consideration of actual value, tech- 
nical conditions, etc. The probabilities of an 
advance equal to half the preceding decline is 
upheld by precedent and makes the method al- 
luring, but granting such an advance, and no 
more, nothing has been gained when it ma- 
terializes. 

In short, it may be said that the scale order 
used as a basis for poor purchases is generally 



MECHANICAL SPECULATION 103 

useless. So employed it differs from ordinary 
methods only in the fact that it will take the 
trader a little longer to lose his money. 

But he who admits that natural market ac- 
tion, manipulation or accident render it im- 
probable that even a careful study of his in- 
tended venture will find for him the lowest 
price and who wishes to adopt a methodical 
plan of operation — for him the scale order pre- 
sents some very favorable features, and is 
recommended for serious consideration. 

The study of precedent will show that the 
scaling method could have been successfully 
employed in almost every standard listed se- 
curity. In fact precedent will show entirely 
too much, in that it presents the fact that the 
method carried out indefinitely would seldom 
have resulted in loss from any point, high or 
low. Even taking the worst possible example, 
a stock so greatly inflated and so widely dis- 
credited as Amalgamated Copper, scaling from 
its extreme high price of 130 in 1901 to the ex- 
treme low price of 33$^ in 1903 would give an 
average price of 82, a point recently exceeded 
in market prices. 

But such figuring as this is useless. An 
extended campaign of this kind contemplates 



104 THE PITFALLS OF SPECULATION 

the use of a vast sum of money, always avail- 
able in cash. 

The danger of pursuing statistics so alluring 
as those presented by a study of past market 
movements as applied to the scaling process lies 
in pointing to what money can do rather than 
what it should do, and in indulging in mental 
and statistical proofs, the actual operations of 
which are past the possibilities of the purse. 
Even if the financial equation is granted, few 
men possess the stability, patience and courage 
to adhere to the rules of such an extended and 
unsatisfying campaign, and without such ad- 
herence the whole structure falls to the ground. 

The best use that can be made of the scale 
order is, therefore, to use it only for the me- 
thodical making of purchases already deemed 
advisable. If the first purchase by this method 
is made at the point at which prior investigation 
and judgment has pointed out as the time to 
buy, irrespective of any inherent virtues which 
may lie in the scaling process, it can seldom re- 
sult in injury, and will generally prove bene- 
ficial. If the method is adopted it must be ad- 
hered to rigidly, unless for some good reason 
the deal is abandoned entirely. In the majority 
of cases this is not done, the operator for some 
reason, impatience, greed, or fright, changing 



MECHANICAL SPECULATION 105 

his plans, in which case the usefulness of the 
method is impaired or eliminated. 

The stop loss order is one of the most abused 
of the methods employed by traders, for, like 
the scale order, it is frequently used at the 
wrong periods, or given credit for tpo much 
inherent virtue. 

In speaking of this method, no reference is 
made to the stop order as employed by brokers 
for self-protection, in which case it is a matter 
of necessity. The point to be considered is its 
value when used voluntarily by the trader for 
his own benefit. 

There is an axiom among traders that the 
best principle in speculation is to take small 
losses and large profits. So popular is this 
axiom that many speculators consider it the 
great secret of success, and in following it em- 
ploy the stop loss order continually in a most 
haphazard manner. 

The expressed theory of small losses and 
large gains sounds good and is all very well in 
itself, but it may be relegated entirely to a class 
who wish to gamble on quotations on a re- 
versal of ordinary public methods, which is to 
take large losses and small profits. The small 
loss trader pins his faith wholly to the belief 



106 THE PITFALLS OF SPECULATION 

that a market will swing not to, but past the 
point where he placed his stop loss. 

On this theory all intelligent figuring as to 
the probable future movements is eliminated, 
and the success is based wholly on mechanical 
chance, in which case the probability of loss 
and gain is exactly the same; that is to say, 
the probability of ten losses of one point each, 
or one gain of ten points, is the same. Those 
who combat the truth of this statement at once 
array themselves as opposed to the expressed 
and accepted consensus of opinion of the 
world's greatest students of the doctrine of 
mathematical chance. 

To contend that any element of intelligent 
forecast of market movement could be com- 
bined with the use of the small loss theory as 
outlined above, is untenable, for if a purchase 
is made because research has shown such pur- 
chase warranted by conditions and the price of 
the stock, we find the stop loss trader in the 
ridiculous position of selling his holdings be- 
low a price he first considered should be cheap, 
at which point he should in reality be con- 
templating further purchases. 

So rooted in some minds is the principle of 
small loss and large gain, that an attack on the 
virtues of such a proceeding will no doubt be 



MECHANICAL SPECULATION 107 

bitterly contested. The argument against it 
however, is sound; it is purely mechanical, 
cannot be combined with intelligent operations, 
has no marked success to its credit, and is not 
adopted by successful traders, i. e. those who 
buy because they consider a thing too low, and 
sell because they consider it too high. 

But there are certain periods when the use of 
a fixed limitation of decline is entitled to con- 
sideration. The trader may find himself in 
possession of certain profits in a market which 
is high, but which his judgment tells him may, 
for technical or other reasons, still advance 
materially. At such a period he may wish to 
provide against accident, or a vicious raid by 
placing stop loss orders below his holdings at 
a point which will insure him the bulk of his 
profit, advancing the point at which loss shall 
be stopped as the market advances. 

Taken the year round, the chance of loss or 
profit from such a course is, as has been stated, 
demonstrably equal; but in the case of high 
prices, the extraneous dangers of accident or 
manipulation, and the advisability of protect- 
ing profits by systematic orders contemplating 
such dangers, the placing of stop orders is 
frequently useful. Even at such periods its 
principal virtue lies in the pre-arrangement of 



108 THE PITFALLS OF SPECULATION 

a desirable course which might be disturbed 
by mental confusion or personal absence. 

It is a debatable question whether it would 
not be better to buy when conditions and 
prices show that purchases are warranted, and, 
per contra, to liquidate when danger threatens 
or when prices look high enough. But to most 
traders systematic arrangement is desirable.* 
and to some minds absolutely necessary. 

As recommended above, the scale order and 
stop loss order in no way interfere with the 
workings of study and judgment, and are fre- 
quently employed by traders whose opinions 
are entitled to respect. Let the fact be taken 
to heart however, that employed as a means of 
speculation, rather than as an aid to it, neither 
method possesses any merit whatever. 

" Chart System " 

There Is an incredibly large number of 
traders who pin their faith to the so-called 
"chart system" of speculation, which recom- 
mends the study of past movements and prices, 
and bases operations thereon. So popular is 
this plan that concerns which make a business 
of preparing and issuing such charts do a 
thriving business. 



MECHANICAL SPECULATION 109 

The theory propounded is that history re- 
peats itself, and that because a property sold 
at a certain low price on some previous occa- 
sion and then advanced, the same thing will 
occur again! There are various offshoots and 
modifications of the system, but the basic plan 
is founded wholly on repetition, regardless of 
actual conditions. The idea is absolutely 
fatuous, entirely untrustworthy, and highly 
dangerous. The study of the past is interest- 
ing and instructive in showing what may be 
expected in the way of general movements, but 
when we are asked to throw reason and re- 
search to one side in favor of only half-demon- 
strated repetitions, the theory becomes unten- 
able. 

The chart traders would have us pore over 
musty records of past movements, and have 
us buy a stock at a certain price because it sold 
there before, without stopping even to investi- 
gate the fact that conditions in that particular 
stock have changed materially. The votary of 
this plan might find himself cheerfully buying 
the shares of a bankrupt and ruined corporation 
in its very process of financial disintegration, or 
on the other hand might refrain from purchases 
at very low prices because it sold at still lower 
prices on some previous occasion. 



no THE PITFALLS OF SPECULATION 

Another class of retrospective speculators 
base their operations on seasons, or even cor- 
responding weeks and months, forming their 
opinions on insufficient research, or on nothing 
at all. If there were in truth any certain period 
of the year or month from which movements 
would occur, the whole world would know it, 
and such knowledge would reverse expecta- 
tions by the rotten technical conditions it 
would create. 

It is useless to enlarge upon the various 
methods employed by the mechanical traders, 
for they are all alike in that they resolve the 
whole speculative structure into a gambling 
machine, with a large percentage against the 
player. To the large number of people who 
risk their money in this manner, and who con- 
tend that there is no use in trying to accurately 
forecast probable movements by actual investi- 
gation, let the following statement be made : 

The man who buys a stock at fifty dollars 
a share because he has good reasons for believ- 
ing that it is worth one hundred dollars, or 
who sells at one hundred dollars on account of 
having good reasons for believing it worth only 
fifty dollars, is the only man in the speculative 
world who succeeds. 

When the study and thought necessary to 



MECHANICAL. SPECULATION in 

forming such conclusions intelligently are 
eliminated in favor of any or all other methods, 
the colossal error is made of expurging from 
the plan of operations the only possible chance 
of sustained success, the great basic principle 
to which all other knowledge, technical or 
statistical, is purely subsidiary. 



XI 

Short Selling 

THE practice of short selling, which was 
formerly largely confined to the pro- 
fessional element, has of late years be- 
come quite fashionable among those members 
of the trading public who speculate regularly, 
and has been even more disastrous than have 
ventures for the long accounts. 

The basis for this action, and the growing 
popularity of the short side is founded on 
natural pig-headed pessimism which will listen 
to no argument, and is incapable of clear rea- 
soning; or what is more common, on conten- 
tions so shallow and silly that it seems super- 
fluous to record them on a printed page. 

Everywhere one hears the belief expressed 
that the "big money" is made on the short side, 
and that the greatest inside speculators are 
Bears. This view is entirely erroneous. 

One of the favorite arguments of the public 
bear element is as follows : the public generally 
buys, and the public generally loses money. 

113 



ii4 THE PITFALLS OF SPECULATION 

Therefore the buying side is the losing side 
and the short side is the winning side. By this 
absurd and wholly unfounded deduction many 
bears are created. 

Now, the fact of the matter is that the for- 
tunes made on the short side of stocks are few 
and far between, while those accumulated by 
judicious operations on the long side are legion. 
The public loses its money, not because it pur- 
chases, but because its purchases are made at 
the wrong periods and its methods of operation 
are bad. 

The accumulated wealth of the Vanderbilts, 
Rockefellers, Astors and Goulds has accrued 
from the continued increase in the valuation of 
properties in which they were interested. 
True, all these lights of finance have been 
justly accused at times of operating for lower 
prices. This is particularly true of the late Jay 
Gould, who was widely known as a wrecker. 
But the wrecking operations were solely for 
the purpose of driving other holders out of a 
certain corporation and creating a sentiment 
and condition which would permit of the pur- 
chase of a controlling interest in the corpo- 
ration in question at low prices. 

So few have been the individuals who oper- 
ated on the short side habitually and success- 



SHORT SELLING 115 

fully that the names of Travers and Cammack 
stand out in bold relief among the horde of 
great traders, and the operations of the suc- 
cessful minority were carefully calculated as 
to periods and safety. Their skillful work and 
clear foresight would probably have made 
more money for them if their operations had 
been reversely conducted. 

"It took me ten years, and cost me two for- 
tunes to become an optimist, but it was worth 
all it cost," said a successful speculator of to- 
day, and in that terse sentence is much food 
for thought. It is possible to make money on 
the short side of the market, but it is very dif- 
ficult, and the man who is capable of acting 
with enough judgment and decision to accumu- 
late gains working against the current is 
doubly capable of succeeding by swimming 
with it. 

The semi-professional traders who trade on 
the short side, as a rule, exercise no more 
judgment or study of actual valuation than do 
the army who purchase They are moved by 
blue talk and general pessimism, and sell at 
the bottom and are frightened out at the top. 
Their operations are simply bad in inverse 
ratio. There is one difference: the purchaser 
who has the means and patience to stand by an 



n6 THE PITFALLS OF SPECULATION 

ill-timed purchase will eventually see daylight, 
while there is no certainty of this desirable con- 
summation for the bear. On the other hand, he 
may see his venture grow more and more dis- 
astrous as time and the advance of the country 
increases the value of the stock he has sold. 
The cycles of speculation will of course bring 
him occasional hope, but these cycles occurring 
from a gradually ascending pivotal point carry 
him further from his original price at each 
revolution. 

The short seller of stocks has against him 
at all times the natural future enhancement of 
values, and more specifically, the earnings and 
dividends of the securities in which he trades. 

To make this more clear let us say that one 
hundred shares of a certain stock, paying 6%, 
are sold short at par, its normal price, and the 
commitment endures for one year. For the 
sake of argument all speculative movements 
will be eliminated, and the assumption made 
that at the end of the year the selling price 
of the stock is still par. It will be seen that the 
seller has had his account charged with six 
hundred dollars in dividends, and thus while 
there has been no advance in the posted value 
of his stock, he has lost six hundred dollars. 

This does not hold good in the case of a pur- 



SHORT SELLING 117 

chase, for even if the high rate of 6% is paid 
on the unmargined balance, these charges are 
covered by the dividends credited to the stock, 
and the normal gain of 6% has been made on 
the actual money deposited as margin. 

For example: one hundred shares of a 6% 
stock purchased at par on ten points margin, 
and sold at the same price one year later, shows 
as follows: 

Total purchase price of stock $10,000 

Marginal deposit 1,000 

Unpaid balance $9,000 

Int. for 1 yr. at 6% on unpaid bal.$540 
Credit account dividends 600 

Credit balance $60 

Or 6% on the thousand dollars actually in- 
volved. 

And on the other hand: 

One hundred shares of the same stock sold 
at par and re-purchased at the same price one 
year later: 

Total credit from sale of stock $10,000 

Total debit from purchase $10,000 

Debit for one year's dividends. . 600 

A loss of $600. If it is presumed that one 



n8 THE PITFALLS OF SPECULATION 

thousand dollars has been deposited as mar- 
gins, on which amount an allowance of 6% 
has been made by the broker, there is still a 
net deficit of $540, with no adverse market 
action. 

In the above examples no account is taken 
of commission charges, but the exhibit is in no 
wise affected by this omission, as the commis- 
sion charges on the short side would increase 
the loss on that commitment exactly as much 
as it decreases the gain on the purchase. 

It will be seen, therefore, that the short seller 
has working against him at all times a tangible 
effect capable of exact demonstration. The con- 
tention is sometimes made that short commit- 
ments are seldom carried for any considerable 
period, and that the man who sells short to- 
day and re-purchases tomorrow, escapes this 
onus. This view is so shallow that it is unneces- 
sary to state to thinking men that the differ- 
ence is wholly a matter of degree, and that the 
Bear in dividend paying shares swims con- 
stantly against the current. 

What is true of one year is equally true of 
one day, and repeated short time operations 
multiply the infinitesimal drawback until it is 
as great as when lumped on one longer con- 
tract. 



SHORT SELLING 119 

And the seller of non-dividend paying stocks 
is no better off, for he combats either the earn- 
ings which are accruing, or the gradual en- 
hancement of the stock through a wise dis- 
tribution of these earnings. In short, whether 
a habitual short seller sells dividend or non- 
dividend paying shares he tampers continually 
with progress. He makes his venture on the 
side of disaster, accident, dishonesty, misman- 
agement, and pessimism, rather than on the 
side of gradual improvement in the business 
affairs and conditions of the country. 

Another pitfall which besets the short seller 
is the danger of deliberate cornering, or of a 
fight for control in his stock. Tremendous ad- 
vances are possible in either case, and even if 
his sales have been made at high prices he 
faces this hazard. The plea that such great 
twists are infrequent will not do, for to be over- 
taken by one such squeeze in a decade is suf- 
ficient to wipe out a great portion, or all, of the 
accumulated gains of that period. 

Concentration of wealth and power make 
such upward manipulation more possible from 
day to day, and this latter statement develops 
another argument, and another important fact 
in answer to that argument. 

The argument is simply that history shows 



120 THE PITFALLS OF SPECULATION 

that severe breaks, and drives against certain 
stocks have been made more frequently than 
corners or squeezes. Drives have been made 
against a certain stock which in a few days 
carried that stock to ridiculously low figures, 
and later it was re-purchased by the same in- 
terest which wrought the havoc in values. 

This is admitted — as a record of the past. 
Such action is out of the question today. The 
method is pursued to some extent, but great 
declines in a brief period no longer come from 
savage individual attacks on certain securities. 
The reason for this is simple; the concentra- 
tion of capital mentioned above, makes such 
action too hazardous. There was a time when 
Mr. Keene would, for a single great interest, 
pound the price of Sugar off twenty, thirty, or 
forty points in a day or two, and then re-pur- 
chase it at low figures. Mr. Keene will never 
do it again, for the enormous sales necessary 
to accomplish this coup would place him and 
his sponsors in danger of losing control of the 
stock. There are now other powerful interests 
well enough aware of the value of Sugar stock 
which would welcome any opportunity of 
wresting the control from present hands, and 
if the well-named manipulator were to do to- 
day what he did even a decade ago, he would 



SHORT SELLING 121 

wake up some morning not only minus the 
control of tfe property, but opposed, in a 
market sense, to interests even more powerful 
than those he represented. 

This places the moneyed speculative inter- 
ests in the position of allowing public folly, 
rather than individual efforts, to bring about 
great declines and low prices, under which con- 
dition the danger of losing control is a matter 
of vigilance and a matching of wits, or possibly 
a community of interests against this same 
public. 

There is no gainsaying the fact that It Is pos- 
sible to so accurately judge of values and 
periods ns to make money on both sides of a 
market cycle, but those who have been suc- 
cessful it* so doing may be numbered on the 
fingers. 

The frequently quoted aphorism of a great 
latter day speculator : "If it's a good sale at all 
it's a good short sale," meaning that if one is 
justified in selling holdings to realize profits, 
he is also justified in selling short, will not bear 
the light of calm analysis. 

There is a vast difference between accepting 
accumulated profits, and being absolutely free 
from further risk with an acquired gain in 



122 THE PITFALLS OF SPECULATION 

bank, and being in a position to lose heavily 
through market action. 

In view of the above facts it would appear 
that for the speculator in the ordinary walks 
of life, the safest course is to confine operations 
to purchases of stocks when they are cheap, 
and to limit sales to the realizing of profits. 
This course necessitates periods of non-partici- 
pation which are decidedly beneficial. It per- 
mits the operator to look with an unprejudiced 
eye upon market actions, frees him of a direct 
percentage working against him in dividends 
and earnings, and best of all, maps out for him 
a fixed and settled plan of operations, con- 
ducted with the current of irresistible improve- 
ment and certain accretion. 



XII 
What 500 Speculative Accounts Showed 

AN examination of almost four thousand 
speculative accounts, extending over a 
period of ten years, developed results 
interesting and instructive in many ways. The 
examination was of an exhaustive character, 
and covered operations of every conceivable 
nature in both stocks and cereals. 

In these accounts all the errors of specula- 
tion were distinctly illustrated. 

The three principal points developed by the 
investigation were that 80% of the accounts 
showed a final loss; that the tendency to buy 
at the top and sell at the bottom was most 
prevalent ; and that most of the operations ap- 
peared to be of a purely gambling character. 
The further fact was established that success 
almost invariably led to excesses. 
The mass of figures derived from so exten- 
123 



124 THE PITFALLS OF SPECULATION 

sive an examination being voluminous and 
complicated, it was considered advisable to 
simplify the matter for presentation in this 
work, pursuant to which decision, the following 
plan was hit upon. 

It was decided to use for illustration a single 
stock, trading in which predominated in the 
operations covering a certain period. In order 
that the illustration should be perfectly fair it 
was decided to make the period begin and end 
with the stock considered, selling at the same 
approximate price. 

As U. S. Ste^l Common offered the best illus- 
tration, 500 accounts, either confined to oper- 
ations in this stock, or showing a large per- 
centage of deals in that security, were selected. 
The period originally contemplated was from 
January to December of the year 1901, but was 
discarded on the theory that the results shown 
would be abnormal, owing to the panic of May 
ninth of that year. It might be contended that 
the tremendous losses sustained in this panic 
were offset by the unusual opportunities for 
purchases at low prices, but as few purchases 
were shown it was thought best to seek a 
period during which nothing abnormal oc- 
curred, but which presented numerous ad- 
vances and declines of an ordinary character. 



WHAT SPECULATIVE ACCOUNTS SHOW 125 

Such a condition existed from July, 1901, to 
March, 1903, during which time there were 
numerous advances and declines in Steel Com- 
mon ranging between 2954 and 4654. In July, 
1901, the stock sold at 37, and in March, 1903, 
it touched the same price, and as the price at 
the beginning and ending of the period is the 
same, and furthermore is nearly midway be- 
tween highest and lowest prices, it would ap- 
pear that about equal chances had been pre- 
sented for profit or loss if the element of 
knowledge and mental acumen were cancelled. 

In other words, viewed wholly as a gambling 
proposition the chances, not considering the 
percentage of commissions, were about equal. 
The reason for making this comparison will be 
apparent later. 

The books of the different firms showed a 
marked unanimity of public action at all times, 
reflecting a general consensus of opinion. This 
applied not only to the 500 accounts chosen for 
this illustration, but to all which were origin- 
ally examined. 

In selecting these 500 accounts every pre- 
caution was taken to exercise absolute fairness. 
No picking over was indulged in, as it is 
obvious that the balance of gain or loss might 
be thrown materially to one side or the other 



126 THE PITFALLS OF SPECULATION 

by such a process. In order to prove the total 
result as compared with the whole, the loss on 
the entire number of shares handled in the 500 
accounts was compared with the loss on the 
total number of shares in the entire four thous- 
and accounts, (operations in grain and other 
commodities not being considered), and the re- 
sult was found to be harmonious. 

No preconceived ideas nor prejudices were 
permitted to enter the investigation, the object 
sought being to establish figures which might 
be considered fairly indicative of what usually 
occurred in public speculative affairs under 
normal conditions. 

It will be understood that the facts and 
figures hereafter presented were based wholly 
upon total results, the entire number of ac- 
counts being finally viewed in a composite 
light. On this theory the following results 
were discovered: 

Three hundred and forty-three accounts re- 
sulted in a net loss at their termination; 88 ac- 
counts resulted in a net profit; 52 accounts 
were even or showed inconsiderable differ- 
ences. The result of 17 accounts is unknown, 
as the Steel stocks represented were taken up 
by the purchasers, in all cases at a considerable 
paper loss. 



WHAT SPECULATIVE ACCOUNTS SHOW 127 

The total deficit on all losing ac- 
counts was $1,245,000 

The total gain on all profitable ac- 
counts 288,000 

Leaving a net deficit of $957,000 

The total number of shares handled was 
1,112,000, of which 820,000 shares were origin- 
ally purchases, and 292,000 originally short 
sales. 

The total brokerage charges, commissions, 
interest, etc., were $275,000, which amount is 
included in the total loss. 

The comparative losses on short sales, share 
for share, were about 20% greater than the 
losses on purchases. 

The favorite method of operation was to 
purchase or sell on slight reactions from high 
or low prices. 

The average price of all purchases for long 
account was 42^6, and the average price of all 
short sales was 35^4. 

The scale order was employed in 53 ac- 
counts, (42 long and 11 short), but was either 
abandoned or interfered with in all but eight 
instances. 

There were numerous evidences of systems 
being used ; this is not susceptible of proof, but 



128 THE PITFALLS OF SPECULATION 

the uniform character of the trading as shown 
by constant repetitions was considered good 
evidence of a fixed method. Over 90% of the 
accounts of this description resulted in loss. 

In 23 instances an inverted scale order was 
employed, purchases being made at fixed in- 
tervals as the stock advanced. This is the 
principle called "going with the market." It 
failed in every instance. 

In considering the above figures, the first and 
most vital point is the predominance of loss 
over profit under conditions as nearly equal as 
possible to present. The reason for consider- 
ing the matter in the light of a gambling tran- 
saction was to develop the fact that the total 
loss was distinctly greater than the percentage 
against the trader as represented by commis- 
sions, the loss being $957,000, and the commis- 
sion charges only $275,000. 

As the price of the stock at the beginning 
and end of the period considered was the same, 
and as nothing of an abnormal character oc- 
curred, this additional loss must be attributed 
to other causes, and here the mechanical draw- 
back ends and the personal equation enters. 

Everything being equal, the surplus loss of 
$682,000 must be attributed to erroneous men- 
tal operations, and when the further fact is 



WHAT SPECULATIVE ACCOUNTS SHOW 129 

considered that the average price paid for 
stocks was 42^8, and the average price at which 
stocks were sold was 35^, the theory that the 
public reverses the methods dictated by reason 
is confirmed. It is apparent that if this proclivity 
had not been indulged in the result would have 
been a net profit ; that is to say, if 37 had been 
taken as a pivotal point, and purchases made 
below, or sales above it, numerous gains could 
have been made on either side, especially on 
purchases, as the short seller would have had 
about 6 points in dividends against him during 
the period, which has not been considered in 
the figures given, but which is reflected with 
considerable accuracy in the composite result. 

An examination of financial columns and 
current gossip at corresponding periods of high 
and low prices showed no well founded reasons 
for the consensus of opinion at such times. 

The gossip rather reflected than incited the 
prevailing cheerful or pessimistic feeling, and 
no particular mischief can be attributed to this 
source. 

Next in importance to the suicidal tendency 
to sell cheap and buy dear was the widespread 
evidence of greed. In almost every case where 
an account was successfully begun, the oper- 
ations were immediately extended in volume 



i 3 o THE PITFALLS OF SPECULATION 

unti^ even after a large number of successful 
results, a single reverse wiped out the entire 
credit. Even those operators who showed ap- 
parent good judgment in buying and selling 
were subject to this fault to so marked a de- 
gree that after being right nine times and 
wrong once, they were on the debit side of the 
ledger. 

The inability of the average trader to map 
out a plan and follow it was also distinctly 
exemplified. Methods and systems begun and 
pursued for a time with mathematical pre- 
cision almost invariably ended in a mass of 
indiscriminate operations caused apparently by 
fright or confusion in case of loss, and exhila- 
ration and enthusiasm if successful. 

Another interesting development was that 
the accounts of those speculators who operated 
from a distance, or from points where no brok- 
erage office was located, made a better showing 
than those of local traders. The losses were 
smaller and the gains larger. The contrast 
was so marked that it would appear that iso- 
lation has its advantages. The marginal pro- 
vision made by these distant traders was more 
ample, and the operations were fewer in num- 
ber. These two points alone were a decided 
advantage. They also escaped the ill-advised 



WHAT SPECULATIVE ACCOUNTS SHOW 131 

action frequently induced by flurries and 
canards, and altogether seemed to operate 
more intelligently, possibly because the oppor- 
tunities to make fools of themselves were re- 
stricted. 

In considering the above figures and deduc- 
tions, it must be constantly borne in mind that 
the market covered a comparatively narrow 
range for an active stock ; that no unusual op- 
portunities for profit or loss existed, and that 
the end of the period showed the stock un- 
changed in price. 

In comparing it with a great cycle of specu- 
lative prices the results would be greatly mag- 
nified. The object in view was to submit re- 
sults entirely of a normal nature. 

It is doubtful whether operations in U. S. 
Steel stock were particularly desirable at any 
time during the period mentioned, as it pre- 
sented no great immediate promise, and nu- 
merous dangers at all times. There were many 
surface indications of a warning character. 
The stock was untried ; the earnings were com- 
paratively so large as to suggest inflation, and 
the fact of it being a public favorite was proof 
of a bad technical condition. 

The student of the technical position of 
shares would have reasoned that the enormous 



i 3 2 THE PITFALLS OF SPECULATION 

floating supply of the stock in public specu- 
lative hands would make any marked or sus- 
tained advance impossible, as any considerable 
appreciation in the market price would meet 
with enough selling to stop the upward trend, 
while the danger of panic or severe decline 
would be increased for exactly the same rea- 
sons. 

It is therefore probable that the better class of 
traders shunned the stock entirely, especially 
when the fact is considered that numerous 
other active stocks presented better opportuni- 
ties during the period considered. 

For instance, Louisville & Nashville made 
and maintained an advance of $25 per share 
from July, 1901, to March, 1903, the advance 
being justified by improved conditions in the 
South. 

Nevertheless U. S. Steel was the public 
favorite, and was obviously the best example 
of public speculation. 

Viewed in the light of comparative results, 
the loss of $682,000 on total transactions of 
1,112,000 shares may at first blush be con- 
sidered small, only a little over fifty cents per 
share, but it must be remembered that this was 
a total deficit on all operations, and that the 
numerous profits made at various times were 



WHAT SPECULATIVE ACCOUNTS SHOW 133 

used as an offset to losses. The question is, 
why should any loss have occurred when there 
was no decline in market valuation? 

If the barometrical character of the exami- 
nation outlined above is admitted, the fact is 
established that a loss was sustained which can 
be attributed to nothing but mistaken methods 
and impulses. In other words, the actual per- 
centage against the trader was more than 
trebled by personal actions, a thing which 
would not have been possible with any me- 
chanical gambling deyice. 

The matter presented in this chapter offers 
much food for thought. It is not in line with 
the alluring view of speculative opportunities 
frequently presented to the public eye. The 
statements already made that speculation 
could be made profitable, are in no way modi- 
fied, but the disease must be diagnosed before 
it can be treated, and some of the medicine 
necessary to financial health has a bitter taste. 

Written large between the lines of every 
disastrous speculative account are the reasons 
for failure. True, this is cold comfort, for 
the losses represented cannot be recovered by 
analysis, but the lesson may be of great value 
in its bearing on future ventures. 

Discovering and charting submerged and 



i 3 4 THE PITFALLS OF SPECULATION 

dangerous rocks by a process of shipwrecking 
is an unpleasant method of acquiring knowl- 
edge, but a most forcible one. 



XIII 

Grain Speculation 

AS a confirmation of the preconceived 
theory that the percentage of loss in 
grain speculation was much greater 
than in stocks, an examination of accounts was 
undertaken based on the same general lines 
outlined in stocks. 

The commodity chosen for investigation 
was No. 2 Wheat, and the transactions con- 
sidered were made on prices established on the 
Chicago Board of Trade. 

The period covered was from January, 1901, 
at which time the price was 76^, to Decem- 
ber, 1903, when the price was 7754. 

During this period of three years the lowest 
price touched was 63% in July, 1901, and the 
highest price, 95 in September, 1902. 

The range for each of the three years was : 

63% to 7Q% in 1901. 

67^2 to 95 in 1902. 

70% to 93 in 1903. 

These figures are presented as evidence of 

135 



136 THE PITFALLS OF SPECULATION 

numerous wide speculative movements occur- 
ring between the same comparative basic 
prices at the beginning and ending of the three 
years. 

Five hundred accounts were found available 
for dissection, and the same appearance of 
unanimity of operations as that apparent in 
stocks was shown. 

The principal seeming difference between 
stock and grain trading was that the public 
indulged more freely in operations for the 
short account in grain than in stocks. Several 
instances were discovered where for a time the 
preponderance of operations were for short ac- 
count, invariably at low prices and on the eve 
of an advance. 

All the errors illustrated in stocks were 
found to exist in grain on a magnified scale. 
The tendency to buy at the top, and sell at the 
bottom, was particularly marked, and while the 
average buying price of 79% may look low, it 
may be said in explanation that the prices of 
95c. in 1902, and 93c. in 1903, were of a manip- 
ulated nature, and of very brief duration, and 
that comparatively few transactions were pos- 
sible at very high prices. If these two abnor- 
mal periods are eliminated, the average price 
was high. 



GRAIN SPECULATION 137 

The investigation resulted as follows: 

412 accounts showed a final loss. 
74 accounts showed a final profit. 
14 accounts were neutral. 

The total deficit on all losing accounts was 
$923,000. The total gain on all profitable ac- 
counts, $52,000, leaving a net deficit of $871,- 
000. 

The total amount of grain handled was 90,- 
000,000 bushels (the speculative equivalent of 
900,000 shares of stock), of which 62,000,000 
bushels were originally purchases, and 28,000,- 
000 originally short sales. 

The total brokerage charges were $112,500. 

The comparative losses on short sales were 
16% less than on purchases. 

The scale order was employed in 140 ac- 
counts, (92 long and 48 short), but was pur- 
sued to an uninterrupted conclusion in only 
21 instances. 

The average buying price was 79%, and the 
average selling price 70^. 

The principal facts illustrated as compared 
with stock operations are a net loss of $757,000 
over and above an actual mechanical percent- 
age of only $112,500, and the small total of 
gross profits as compared with the total of 
gross losses. 



i 3 8 THE PITFALLS OF SPECULATION 

It has been stated that the grain investiga- 
tion was begun with the preconceived opinion 
that losses in grain would be proportionately 
larger than those in stocks, and the result, as 
far as it goes, is confirmatory. It is only fair 
to state in this respect that losses shown in 
corn were comparatively larger than in stocks, 
but much smaller than in wheat. This is prob- 
ably explained by the fact that corn has under- 
gone a readjustment of valuation through its 
increased uses, and enormous increase of ex- 
portation, both of the cereal itself and its by- 
products, and also the fact that we raise 80% 
of the world's corn, and that available acreage 
is about exhausted. 

These facts were so patent as to be of as- 
sistance to even the obtuse mind of the ordi- 
nary speculator, and as purchases predomin- 
ated, and the price has gradually advanced, 
comparative losses were smaller. 

The preconceived opinion as to losses in 
grain operations was based upon the irrefut- 
able fact that study and judgment must in 
.such operations be largely superseded by 
purely gambling principles. In other words, 
the probable price of grain cannot be intelli- 
gently forecasted by the ordinary speculator, 
as no reliable figures are obtainable, and no 



GRAIN SPECULATION 139 

prophecies as to future conditions can be re- 
liably adduced. The annual crop scares are 
not dependable, and actual conditions which 
bear upon future prices are available only to 
the chosen few who can afford to make their 
own expensive investigations! 

It is needless to say that possessors of val- 
uable knowledge do not diffuse their informa- 
tion, nor expose their operations to public view 
until the psychological moment arrives at 
which they wish to sell, * 

It is possible to obtain figures as to the earn- 
ings of corporations, and such figures being at 
hand, the rest is a matter of judgment and 
study, but no figures which may be considered 
a safe basis of operations are obtainable anent 
cereals. 

In addition to the gambling elements which 
this lack of knowledge injects into operations 
in cereals, they are much more subject to man- 
ipulation. The record of a single individual 
"dumping" the entire speculative public in 
wheat, is not rare in the history of grain specu- 
lation, and the capital employed in the opera- 
tion would not make a hearty meal for Wall 
Street. 

There is another drawback to grain specu- 
lation as compared with stocks, and while it is 



i 4 o THE PITFALLS OF SPECULATION 

apparently overlooked or ignored by the aver- 
age trader, it is important, and is as follows: 

The possessor of ioo shares of stock bought 
at a normal price, is the recipient of dividends, 
or may naturally expect ultimate improvement 
in his security if it is a good one. 

The possessor of 10,000 bushels of grain at a 
normal price is subject to storage charges and 
insurance, and has equal chances of profit or 
loss in future prices. 

To illustrate this: The man who invests $10,- 
000 in a 6% stock, at par, receives $600 per 
year on his investment, while he who invests 
the same amount in 10,000 bushels of wheat 
at $1.00 per bushel, pays about $1,200 a year 
to carry his property. This is looking at the 
matter as a cash proposition, but the com- 
parative drawback cannot be escaped by any 
form of operations for the long account, 
whether the transaction be for one day or one 
year. 

The optional nature of grain presents an- 
other drawback in that an unfortunate opera- 
tion cannot be continued indefinitely, except 
by the process of transferring to more deferred 
options with a multiplication of commission 
charges. Even by this process the transferred 
trade may be regarded in the light of a new 



GRAIN SPECULATION 141 

transaction, as the buyer's original reasons for 
believing that the present, or coming crop, 
would be salable at a certain price before the 
maturity of the option purchased, have been 
entirely obliterated by the lapse of time, and 
he now finds himself depending upon the 
chances of recovering in the new transaction 
the losses sustained in the old. 

If he accepts and pays for the commodity, 
and a year later finds that the price has ad- 
vanced 12 cents, his position is in no way im- 
proved, as the expense of carrying his product 
for that period has offset the higher market 
value. 

The trader who purchases wheat has against 
him, therefore, all the ordinary drawbacks of 
misleading appearances, manipulation, etc., but 
in addition, the element of purely gambling 
chance is greatly increased, and a tremendous 
submerged percentage added. 
; The foregoing statements at once suggest 
the question, "If successful operations for the 
long account are so difficult, why should not 
operations on the other side present advantages 
in direct inverse ratio?" 

The point is well taken, and the answer is 
simply, "they do present such opportunities." 
This advantage is illustrated to some extent 



i 4 2 THE PITFALLS OF SPECULATION 

by the fact that operations for the short ac- 
count, in grain, showed a larger ratio of profit, 
or rather, a smaller ratio of loss, than was 
found in purchases. 

But in public short selling we find that a too 
general recognition of its advantages would 
lead to the undoing of the trader by creating 
a technical position which would be very in- 
viting to the moneyed manipulators. This 
danger must be considered, as well as the fact 
that the theory of accidents being in favor of 
the short seller of stocks, is exactly reversed 
in grain. For instance, war, classed as the 
greatest of all calamities under certain con- 
ditions, is an invariable reason for higher prices 
in food products. The tendency to sell at low 
prices also prevails and must be overcome if 
operations for the short account are to prove 
profitable; but brushing aside all these ele- 
ments of accident or error, it may be stated 
that the short seller of cereals possesses a dis- 
tinct advantage. 

The fact will no doubt be pointed out that 
short operations have proved uniformly dis- 
astrous in the past few years. While this is 
granted, it in no way interferes with the argu- 
ments but rather supports them in its demon- 
stration of the possibilities of manipulation by 



GRAIN SPECULATION 143 

one or two individuals. But there is another 
reason for this reversal of form which was 
apparently recognized by a few men and stub- 
bornly overlooked by the majority. The fact 
is that all staples have recently undergone a 
process of revaluation to a higher basis and 
that the seller of every product has worked 
against the current of this universal readjust- 
ment. 

That the public is slow to recognize changed 
conditions is demonstrated by the fact that 
the period of high prices from the latter part 
of 1888 to early in 1892 finally educated them 
to consider one dollar the normal price of 
wheat at just the time when a readjustment to 
lower valuation took place and enormous 
losses were sustained by a tenacious adherence 
to this theory of dollar wheat until the expen- 
sive lesson had been ground into them that a 
change had occurred. The more recent re- 
adjustment to high prices was likewise un- 
recognized and vigorously combatted. 

This is a very marked evidence of the fact 
that speculators generally move more on a 
mental chart of recent market action than upon 
any broad lines of thought. 

It would be really amusing to review the 
opportunities set forth by the advocates of the 



144 THE PITFALLS OF SPECULATION 

so-called chart system as applied to grain 
trading for the last fifteen years. We find 
them in the position of purchasing wheat 
through a period of depression and later sell- 
ing it persistently through a period of advanc- 
ing prices, for it must be admitted that 
changed conditions cannot be contemplated in 
a fixed system founded on past, not future 
events. The votaries of the charts will no 
doubt attempt to evade this statement by 
demonstrations covering an insufficient period 
or by claiming that changed conditions were 
recognized and their little machines readjusted 
to meet them. The first refutation is simply 
unfair, and if the second is true, correct recog- 
nition would have been sufficient without any 
auxiliary machinery. 

The difficulty of successful operations in 
cereals by ordinary traders is very pertinently 
shown by the remarks made by the most suc- 
cessful bucket shop man in the United States. 

"I can better afford to trade flat in grain 
than to trade in stocks at one quarter commis- 
sion ; they have nothing to go on/" 

This is the statement of a man who looked 
upon the matter in a purely gambling light and 
admitted that he could eliminate the actual 



GRAIN SPECULATION 145 

percentage in grain transactions and depend 
wholly upon the speculator beating himself. 

Even the greater lights of speculation, forti- 
fied by large capital, have found the hazards 
of grain speculation so great, and the most 
careful forecasts so unreliable, that in many 
instanc.es, and after disastrous experiments, 
they have transferred their operations wholly 
to stocks. Mr. James R. Keene twice retired 
from the Chicago arena a badly whipped man, 
and it is related of him that he refused an in- 
timate friend financial assistance in a grain 
deal with the terse remark that he would be 
doing him no kindness, as it was impossible to 
win. 

This is, of course, an extreme view, for 
money lost by one man must necessarily be 
gained by another; but this fact does not in- 
terfere with the broad general principle that 
stocks of good corporations are productive, 
and that the possession of staples is an ex- 
pense. One is for perpetual existence and 
natural enhancement, the other for consump- 
tion. 

The contention of Mr. Keene that it is im- 
possible to make money in cereal speculation 
cannot be wholly concurred with. The man 
who is astute enough to foresee a final read- 



i 4 6 THE PITFALLS OF SPECULATION 

justment of values or who purchases staples 
at an extremely low price in periods of de- 
pression, and vice versa, will succeed; but the 
average grain trader will find his opportunities 
and possibilities reduced, and his obstacles 
multiplied by comparison with operations in 
stocks. 



XIV 

Suggestions as to Intelligent Methods 

IN deciding what to buy and when to buy it, 
the speculator faces the most formidable of 
his problems, for upon his decision upon these 
two points rests success or failure. 

It will be necessary for him to concentrate 
upon this task research, labor and clear think- 
ing, coupled with technical knowledge and 
sustained by precedent. 

In approaching the first phase of the ques- 
tion — What to buy — it may be well to employ 
the time-honored method of elimination, and 
to consider primarily what not to buy. 

It seems incredible that the numerous oil, 
mining, and other companies which advertise 
large returns on low priced stocks, or immense 
values for small investments, should find a 
market, but the fact remains that the money 
annually invested (?) in this class of stocks is 
so considerable an amount as to demand some 
comment, and warrant a note of warning. 

This class of so-called securities may be 

147 



148 THE PITFALLS OF SPECULATION 

said, t>y and laf gej to have no value at all. 
Securities which have an actual dividend earn? 
ing j>o,wer of any probable duration do not go 
begging long in this day and age, and are 
seldom advertised for sale iii the newspapers. - 

Let this fact be remembered : a mine, an oil 
well, or any other producing company with a 
demonstrable value can command a market 
price at all times. That is to say, if the owner, 
or owners of a mine can* show a certain amount 
of ore in sight, or can prove that such ore 
exists, they can command a fair price for that 
ore as surely as if the commodity were flour in 
a storehouse instead of gold, silver, or copper 
in a mine. Any man who has a knowledge of 
mining affairs, (and who has no mining stock 
for sale), will confirm this statement. 

If, therefore, the sellers of stock in such com- 
panies have a property, capable of producing a 
certain commodity which may be sold at a 
profit, they must, in order to reap any substan- 
tial benefit from the "stocking" operation, sell 
as much of the stock at high prices as to cover 
the great expense of time, a costly advertising 
campaign, officers' salaries, a large commission 
to fiscal agents, (usually 20%), and leave a 
margin of profit for themselves. They must, 
in short, sell to the public at about double the 



SUGGESTIONS AS TO METHODS 149 

value placed on the property by men of wis- 
dom and experience. 

There are no doubt cases where the pro- 
moters of such securities believe that the value 
of their own property is greater than any ap- 
praised market, in which case we find their 
judgment opposed to that of shrewd men seek- 
ing to invest capital. In such opposition of 
judgment the owners may be right — the 
chances are a hundred to one that they are 
wrong. 

But even the above examples are too broad, 
for the great majority of the6e concerns have 
no property of any demonstrable value what- 
ever. Their stocks are made, like Hodge's 
razors, to sell. The promoters depend upon 
golden promises, statements misleading, or 
actually false, and public gullibility to create a 
market for their stocks. That they are able 
to sell them at all is remarkable. 

These companies use every means for de- 
ceiving the public. They employ the best of 
writers to get up glowing prospectuses, and not 
infrequently the names of prominent men are 
found among their officials or directors. These 
latter individuals participate sometimes through 
ignorance and enthusiasm, sometimes through 
actual dishonesty. In either case it may be 



150 THE PITFALLS OF SPECULATION 

justly stated that a prominent name added to 
the roster of an advertising company is not 
sufficient proof of the property's merit. 

In addition to these facts there is no recog- 
nized market for this class of stocks, and they 
cannot be disposed of like listed securities, at a 
moment's notice. This is in itself a great draw- 
back. 

In making these statements there is no pre- 
judice nor desire to be unfair. There are no 
doubt exceptions to the rule, but these excep- 
tions are so rare that the best plan possible is 
to eschew all such properties entirely, no matter 
how alluring the promises, or how apparently 
well founded the venture. There are plenty of 
good listed securities, the prices of which 
periodically reach high and low points, the 
value of which is founded upon recognized 
business principles and necessities. 

The listed securities of Wall Street are di- 
vided into two distinct classes: Industrial and 
Railroad ; and viewed from a speculative stand- 
point the former class is the most hazardous, in 
that they are generally more subject to manipu- 
lation, competition, or harmful legislation. 
Those who possess a sufficiently tenacious 
speculative memory will recall the affairs of the 
Whiskey trust and the Cordage trust and their 



SUGGESTIONS AS TO METHODS 151 

sad demise ; and while great declines, and even 
assessments, have occurred in railroad stocks, 
they have always eventually proved their real 
value. Good Industrials may occasionally be 
purchased safely and profitably, but the rails 
present the same opportunities, and are safer 
and more open to comprehensive investigation 
and correct judgment. 

At the rails, therefore, we stop. It may be 
argued that the process detailed above is a mat- 
ter of degree, and that it might be continued 
until only government, or other gilt edged 
bonds, remained; but the question here dis- 
cussed is speculation, and it is taken for granted 
that what is sought is the golden mean between 
certain loss and certain cent per cent. ; i. e. prop- 
erties which combine a fair amount of stability 
and future promise with periodical opportuni- 
ties for advantageous purchases and sales. 

Viewing the future of railroad securities in 
a broad general light, their gradually increasing 
value appears certain. The continued increase 
of population produces for them present returns 
from travel and shipping, and the demands of 
the settled districts ensure more permanent re- 
turns. So far as probable competition is con- 
cerned, it grows daily less with the concentra- 
tion of capital. It is likely that even today the 



i 5 2 THE PITFALLS OF SPECULATION 

projectors of a railroad which would come into 
harmful competition with present lines would 
find it impossible to raise the money for the 
furtherance of their plan. 

A brief perusal of statistics will show that 
the oldest and best railroad securities, repre- 
senting the properties traversing a densely 
populated territory, are subject to the smallest 
comparative rafige of fluctuation. These stocks 
are gradually undergoing a process of absorp- 
tion which will in time reach to the newer 
roads of less developed country. 

The West, with its enormous undeveloped 
territory and resources, presents great promise 
to the prophetic mind. The problem of ex- 
tensive irrigation is yet to be solved, but aside 
from agricultural pursuits, the West possesses 
a wealth of mineral and lumbering industries, 
and possibilities which independently guar- 
antee its future. 

"The Atchison Railroad is a streak of rust 
running through a desert," said the elder 
Woerishoffer thirty years ago, as he industri- 
ously sold the stock short at prices which would 
seem ridiculously low today. Possibly Atchi- 
son bore that aspect at that time, but today it 
is a modern, well equipped, dividend paying 
property, traversing a rich and constantly im- 



SUGGESTIONS AS TO METHODS 153 

proving territory. The improvement of that 
brief period is significant. 

The South also presents promise of great 
future improvement. The readjustment of 
cotton prices to a higher general level, and the 
development of important mineral resources 
are combining to dispel the long lethargy of 
this section, and the growing competitive im- 
portance of its gulf ports is too glaring to be 
misunderstood. 

The believer in the •continued growth and 
prosperity of the Unfted States, the progress 
of the largely undeveloped West, and the 
awakening South may safely assume a gradual 
and rapid growth in the value of railroad 
securities of these sections. The consensus of 
intelligent opinion points to their long-con- 
tinued improvement and advance. 

The contention is therefore made and offered 
for consideration that the railroad properties 
of the West and South offer the best specu- 
lative opportunities, combined with the great- 
est degree of safety. 

The foregoing will, possibly, appeal to the 
reader as looking rather to the long future of 
properties than to immediate speculative op- 
portunities, but the fairness of the following 
statement must be admitted: 



i 5 4 THE PITFALLS OF SPECULATION 

The hazards of speculation are so great that 
it is expedient to primarily consider a solid 
groundwork for ventures. The trader who 
deals in stocks, the future of which he con- 
siders secure, can operate more actively and 
courageously than under other circumstances. 
It does not follow that because he has faith in 
the long future of his chosen properties, he 
shall at once jump in and buy and await the 
accretion of time. The proposed plan of oper- 
ation — to await low prices — is in no way 
changed by the cheerful view of the future. 

Having formed a definite idea as to the gen- 
eral outlook of a certain group of properties, 
the investigator has narrowed his research to 
individual stocks. In this he will be guided 
by three periods — the past, present, and prob- 
able future. 

In examining the history of a stock it 
will be found that in almost all cases the se- 
curity has undergone, in early stages, a radical 
advance and decline. This is largely oc- 
casioned by the fact that the public always 
makes a favorite of a new security, and will 
participate freely in the affairs of an untried 
corporation, while standard issues go begging. 
This brings about a state of affairs already ex- 
plained both technically and theoretically, and 



SUGGESTIONS AS TO METHODS 155 

offers to the moneyed interests an opportunity 
to sell their holdings to the public at high 
prices, and recover them later at their own 
figures. Thereafter, the stock will probably 
take its place among the standards of the 
Street, and follows the general swing to high 
an3 low extremes with a gradual trend toward 
increased valuation. 

Eliminating this abnormal period of initi- 
ation, the investigator will find a careful study 
of the past to be of great value. In all cases 
it will be found that earnings have gradually 
increased, allowing, of course, for abnormal 
periods of depression and inflation. The fixed 
charges and expenses have also increased, and 
by an examination of both these factors, as 
well as an allowance for the diversion of funds 
for purposes of purchase and improvement, 
which expenditures if intelligently made must 
add to the value of the property, the net re- 
sult of the past may be considered a reason- 
able guide to future expectations. 

The mere payment of dividends cannot be 
accepted as a safe basis of value, for dividends 
are often paid to the great detriment of the 
property, and on the other hand are frequently 
withheld when they might be safely paid. 
Earnings are the all important point, and 



i 5 6 THE PITFALLS OF SPECULATION 

when the investigator has answered to his sat- 
isfaction the questions, "What have they 
earned, and what have they done with the 
money?" he may consider himself well on the 
way to his goal. 

With this record of the past formed, the 
present earnings may be scrutinized. They 
may recently have undergone a sudden advance 
out of proportion to normal growth, or vice 
versa. In either case a reversal of present con- 
ditions may be confidently expected. 

This simple form of reasoning applied to the 
affairs of the United States Steel Company in 
1901-1903 would have sounded a most distinct 
note of warning, the correctness of which has 
been amply demonstrated. 

The probable future is based upon a gradual 
improvement from the normal value of the 
present as indicated by the past. 

The consideration of assets, so far as a rail- 
road property is concerned, must be founded 
principally on its ability to earn, and continue 
earning perpetually. 

Minus its usefulness, the total assets of the 
greatest railway system in existence would be 
little better than a mass of old junk; but if a 
million dollars has been so expended as to bring 
a continued fair return, that amount may be 



SUGGESTIONS AS TO METHODS 157 

considered an asset. The investigator there- 
fore finds that his calculations must be based 
almost wholly upon the ability of a property to 
increase its earning power until territorial 
development reaches high tide, and thence- 
forth to maintain such earnings indefinitely. 

It will not be necessary for the trader, per- 
sonally, to compute the various and volumin- 
ous figures which show the net earnings — that 
is to say, the amount applicable to distribution 
to the various bond and stock holders. A com- 
prehensive statement of income and expendi- 
ture may be obtained from different published 
statistical works, or by application to the sec- 
retary of the corporation in question. With 
these figures before him, the task of the stu- 
dent is one of examination rather than of com- 
pilation, and with such information at hand, 
the matter may be viewed in the same light as 
any other ordinary business transactions. The 
total income, less the fixed charges, is the 
amount applicable to dividends and surplus. 

The man who undertakes such an investi- 
gation will be surprised at the ease with which 
he may arrive at interesting results. 

The legal provisions of the company, the 
rights of holders of preferences, and of holders 
of common stock, etc., are all matters which 



i 5 8 THE PITFALLS OF SPECULATION 

should be examined, as they frequently have 
an important bearing on values. 

If the plan mapped out has been intelligently 
followed, the investigator should, by com- 
paring his result with the value of money, be 
able to judge of the normal value of any stan- 
dard security. If his figures vary materially 
from the market price, and no important error 
nor omission has been made, the stock is sell- 
ing either below or above a fair valuation, and 
the information which was the object of all his 
research has been gained. Possessed of this 
valuable knowledge, the speculator now turns 
his attention to the second phase of the ques- 
tion — the time to buy. It may be that the 
price of his favorite security is very low, but 
that a bad technical position exists which will 
warrant a belief in lower prices, or an extended 
period of dullness. This situation has already 
been sufficiently enlarged upon. 

Recapitulating the matter offered above for 
consideration, the course recommended would 
appear as follows: 

First, decision as to the securities to be dealt 
in, eliminating all wildcat and untried stocks, 
and choosing for operations standard listed 
securities. 

Second, determining what stocks offer the 



SUGGESTIONS AS TO METHODS 159 

greatest promise of continued increase in value, 
as determined by territory and its probable de- 
velopment and growth. 

Third, an examination of the physical and 
financial condition of the individual property, 
or properties, chosen, and a forecast of the 
probable future, based upon the demonstrated 
past. 

Fourth, the fixing of a present normal value 
to be used as a pivotal point in actual oper- 
ation. 

Fifth, a consideration of the manipulative 
and technical conditions of the machine specu- 
lative in order to be able to judge of the more 
immediate action of the market. In other 
words, to locate the position of the stocks, 
whether in weak hands or strong. 

This form of reasoning should not appear 
complicated; it is the same process which any 
business man would pursue in following a de- 
termination to enter the grocery business, and 
yet it may be emphatically stated that not one 
speculator in a hundred enters his field 
equipped with even the most desultory knowl- 
edge of what he is doing. Out of ten traders 
in U. S. Steel Preferred who were experiment- 
ally questioned two years ago, only half the 
number knew what the issue of preferred 



160 THE PITFALLS OF SPECULATION 

stock amounted to; only two were aware of 
the important fact that the dividend on the pre- 
ferred stock was cumulative, and not one was 
reasonably well posted as to its properties and 
earnings. 

And yet every one of these individuals could 
adduce specious reasons why the stock should 
advance or decline, reasons which at best were 
incomplete, and at their worst, silly or false. 
The outcome of their individual efforts has not 
been followed, but it is safe to surmise that all 
made mistakes which research, coupled with 
intelligent judgment, would have prevented. 

In the plan of study submitted in this 
chapter, there will, no doubt, be a sense of in- 
completeness, but the object has been rather 
to guide the reader into a correct line of rea- 
soning and investigating than to adduce 
specific cases or pile up statistical proof. 

Everything is left to individual effort and 
judgment, and the man who begins the process 
of research suggested will make rapid pro- 
gress. One developed fact will suggest an- 
other point to be investigated, and the process 
will become interesting and profitable. 

The man who studies and knows, is the only 
man who makes permanent gains in specu- 
lation. 



SUGGESTIONS AS TO METHODS 161 

To those who refute the possibility of ob- 
taining the necessary information for the form- 
ing of such opinions, or who consider the task 
too great or too complex for the ordinary 
mind, let the fair reply be made, "Try it." It 
is this hazy idea of mystery where none exists 
which deters the ordinary speculator from 
even attempting to use his own brains, and 
which leads him to base his operations upon 
hearsay or guesswork. Cases will occur where 
concealment, either partial or total, will be 
found. For such the remedy is simple: let 
these properties alone. 

If the first step toward the investigation of 
the affairs of Amalgamated Copper had been 
taken, it would have appeared at once that the 
corporation was a mere shell, a holding com- 
pany, and furthermore, a blind pool of the most 
pronounced type. The value of such knowl- 
edge employed in a negative sense, that is, in 
preventing operations in such hippodromed 
stocks, is a matter of history. The enormous 
public losses sustained in Amalgamated Cop- 
per would have been impossible in any busi- 
ness on earth except speculation, for in any 
other business affair examination would have 
been the first thought, and negotiations under 



162 THE PITFALLS OF SPECULATION 

parallel conditions would have been abruptly 
dropped. 

It is not meant to say that a mere examin- 
ation of figures and periods is by any means 
sufficient, but it is believed that once started 
in the correct path of examination and judg- 
ment, as opposed to the prevalent methods of 
guesswork and gambling, the trader will find 
ample opportunities and incentive for pursuing 
his researches to a logical conclusion. After 
this has been accomplished, success will be 
measured by his own capabilities and business 
acumen. 

The chapter headed, "Analyzing Railroad 
Securities, ,, in Mr. John Moody's book, "The 
Art of Wall Street Investing," will be of great 
assistance to the student who attempts to fol- 
low out the suggestions made above. 



XV 

Simple Methods of Analysis 

T T was stated in the first edition of this work 
■^ that it would be obviously impossible, in 
the limits of a single volume, to set forth 
in detail the methods which should be em- 
ployed in a scientific analysis of the conditions 
and prospects of railroad and industrial stocks. 
There are, however, a few salient points in the 
study of the status of a security which are 
more important than all the details combined. 
If we are sure of our ground so far as these 
essentials are concerned, the probabilities of a 
serious error are greatly reduced. It is the 
purpose of this added chapter to present in sim- 
plified form the vital elements of a corporation 
report and to suggest methods by which these 
elements may be examined and interpreted. 

i. Interpreting Railroad Reports. 
The business of a railroad is no different, in 
its fundamental points, than that of any other 
enterprise. The basic problems which present 
themselves for solution may be outlined as 
follows : 

163 



164 THE PITFALLS OF SPECULATION 

A — How much money is being taken in. 

B — What is it costing to operate the road? 

C — How much is required to pay the inter- 
est on the money borrowed? 

D — What are the profits? 

This condensed formula requires some ex- 
planatory elaboration : 

A — How Much Money is Being Taken In. 

This point, of course, refers to the gross 
earnings. These should be examined, not only 
in bulk, but on a per-mile basis. Otherwise, 
the results are apt to prove misleading. The 
gross earnings of a railroad naturally grow 
larger from year to year, as population and 
density of traffic increases. The figures may 
show that the gross earnings of a certain road 
have doubled or trebled in a decade, but the 
exhibit standing alone may be meaningless, for 
the miles of road operated may also have been 
doubled or trebled, in which case no actual im- 
provement would be shown. The per-mile 
earnings of a road are simply the gross for that 
period divided by the number of miles oper- 
ated. In this regard the student should exer- 
cise care in discriminating between miles of 
line and miles of track. The old method of 
taking miles of line as the divisor was sound 
enough in the days of single-track roads, but 
now that many roads have multiple tracks such 



SIMPLE METHODS OF ANALYSIS 165 

a prescription would bring grotesque results. 
Also, even where double tracking has not yet 
been extensively employed, we find many "lap 
sidings." These are, in reality, long stretches 
of track in the form of siding which permits 
two trains going in opposite directions to pass 
without stopping. They are, therefore, in ef- 
fect, double track. 

As a general rule, it is much better to base 
figures on miles of track, as each mile of track 
must in some way add to the efficiency and 
earning capacity of a road, else it would not be 
built. At any rate, there is no danger of arriv- 
ing at any incorrect conclusions if we adopt 
this rule. 

After examining the progress of per-mile 
gross earnings over a period of years the stu- 
dent may bring his investigations up to date 
by following the same process in regard to the 
monthly and weekly earnings which the roads 
are required to submit to the Interstate Com- 
merce Commission. 

Having arrived at a satisfactory conclusion 
as to gross earnings, the next step is to deter- 
mine what portion of these earnings has been 
used for 

B — Operating Expenses. 

These figures cover the transportation ex- 
penses (which are principally labor) ; the main- 



166 THE PITFALLS OF SPECULATION 

tenance of way and structures (upkeep of 
"roadbed," bridges, depots, etc.) ; the mainte- 
nance of equipment (cars, engines, etc.) and 
traffic and general expenses (advertising, offi- 
cers' salaries, stationery, etc.). There is no 
rule of thumb by which we may determine the 
condition of a road by reference to its ratio 
of operating expenses to gross earnings, as 
much depends on the amount required for in- 
terest on funded debt, taxes, and other items 
which must be adjusted after operating ex- 
penses have been paid, but, roughly speaking, if 
operating expenses consume more than 70% 
of gross earnings, the condition of the road is 
not very favorable. 

Assuming 70% as the operating ratio, it is 
next essential that we determine what propor- 
tion of this 70% is being expended for mainte- 
nance and what proportion for cost of conduct- 
ing transportation, which are the two big fac- 
tors in operating expenses. A low cost of con- 
ducting transportation, together with high ex- 
penditures for maintenance, is almost invari- 
ably a favorable sign, as such conditions rep- 
resent economy in operation and good physi- 
cal conditions. Conversely, high cost of con- 
ducting transportation and small expenditures 
for maintenance is distinctly unfavorable. In 
this case also it is impossible to formulate any 
set rule, as 20% of gross would be high main- 



SIMPLE METHODS OF ANALYSIS 167 

tenance in one territory and 25% would be 
low in another. Comparisons of several roads 
in the same sort of territory will greatly assist 
the student in his calculations. It will not be 
necessary to do any considerable amount of 
personal compilation in this direction. There 
are several excellent works which give all the 
percentages for years back. I will mention 
these at the conclusion of this chapter. 

Subtracting the expenditures for operating 
expenses from the gross earnings, we now have 
the operating income. The operating income, 
plus the "other income," if any, is the net 
amount available for 

1 — Payment of taxes. 

2 — Payment of interest on bonds or notes. 

3 — Disbursements in the form of dividends, 
expenditures for improvements and better- 
ments, or reserves for surplus. 

The item of "other income" should always 
be carefully scrutinized. Sometimes this is 
very important, as in the case of Southern Pa- 
cific, which derives a large part of its income 
from interest and dividends on stocks owned. 

This brings us down to 

C — Fixed Charges. 

It may be found that while a road is being 
operated economically and maintained prop- 
erly, so that the total expenditures for operat- 



168 THE PITFALLS OF SPECULATION 

ing expenses are low or reasonable, the amount 
of interest required on outstanding bonds and 
notes is so great that little or nothing can be 
saved for dividends or surplus. The stock 
of such a road has little value until, through 
natural growth of earnings, because of in- 
creased density of population and traffic, the 
trouble is cured and profits are available or in 
sight. If a road consumes more than half the 
net income (after all operating expenses) in 
taxes and fixed charges, there can be no assur- 
ance of stable dividends. This is because in a 
lean year fixed charges and taxes remain rigid, 
and operating expenses do not shrink rapidly. 
A very small decrease in gross will, therefore, 
have a very serious effect on profits. Mr. Carl 
Snyder, in his admirable book, "American 
Railways as Investments," which is now out of 
print, explains this point very clearly by means 
of a simple example, which is reproduced be- 
low: 

"The high degree of stability imparted to in- 
terest payments and dividends by a low per- 
centage of fixed charges, and the high degree of 
instability imparted by a large percentage, is 
so elementary that it would seem to need no 
emphasis. And yet this item is habitually dis- 
regarded by perhaps 90% of bond and stock 
buyers. On this account it may be worth while 
to illustrate by simple comparison the effect of 



SIMPLE METHODS OF ANALYSIS 169 

a 20% decline in gross or net earnings. We 
will compare the conditions of two roads whose 
fixed charges are respectively 75% and 25% of 
the total net income. The operation would be 
as follows : 

Suppose a 20% Decline 

Say Earnings $1,000,000 $800,000 

Exp. (70%) 700,000 560,000 

Net $ 300,000 $240,000 

If F. C. 75% 225,000 225,000 

Surplus for div $ 75,000 $ 15,000 (Case I) 

Decrease 80% 

IfF. C. 25% 75,000 75,000 

Surplus $ 225,000 $165,000 

Decrease 26% (Case II) 

"It will be seen from the above that a 20% 
decline in the net earnings would, in the first 
instance, mean a decrease of 80% in the sur- 
plus; while in the second case, the same de- 
cline would mean a decrease of only 26% in the 
surplus — figures which sufficiently indicate 
what a high percentage of fixed charges 
means." 

D — Profits or Surplus. 

For the sake of simplicity, let us take the 
case of a hypothetical road with gross earn- 
ings of $100,000,000 per year. 



170 THE PITFALLS OF SPECULATION 

3 

Gross Earnings $100,000,000 

Operating Expenses 

Transportation Traffic, etc $30,000,000 

Maintenance 30,000,000 60,000,000 

Net Operating Income $ 40,000,000 

Fixed Charges and Taxes 15,000,000 

Net Income $ 25,000,000 

Stock Dividends (6% on 

$250,000,000) 15,000,000 

Additions and Betterments 5,000,000 20,000,000 



Surplus $ 5,000,000 

V 

This would represent a sound and well-man- 
aged road. Operating expenses are 6o% of 
gross; cost of conducting transportation is 30% 
of gross, and maintenance 30% of gross, 
showing economical operation and high phys- 
ical condition. Fixed charges are low, be- 
ing less than 38^ of net income, and 
there is a good margin over dividend require- 
ments. There is an old saying that a dollar 
ploughed back into additions and betterments 
is eventually worth two dollars to the stock- 
holder, so the money thus diverted may be con- 
sidered an emolument, in addition to the lib- 
eral dividend rate. Also the surplus cash will 
serve to stabilize dividends in lean years. 

The Question of Stock Capitalization. 
It may happen that net income after all ex- 
penses or charges will be found very large and 
that all tlie items of distribution of gross earn- 



SIMPLE METHODS OF ANALYSIS 171 

ings up to this point will be satisfactory. But 
this does not necessarily mean that the stock 
would be valuable. That would depend largely 
upon the amount of stock capitalization. Net 
income which would be sufficient to pay 6% 
on $100,000,000 of stock would only be equiva- 
lent to 3% on twice that amount of capitaliza- 
tion. Also the property equities would be di- 
luted in the second case. It is necessary to as- 
certain, therefore, what percentage the net in- 
come amounts to as applied to the stock. In the 
hypothetical case illustrated above the $25,- 
000,000 of net income would be equal to 10% 
on the stock. As dividends are at the rate of 
6% the "margin of safety" is 4%. 

This is all very sketchy and, in examining 
the reports of railroads, many items of minor 
importance will be found. But if the funda- 
mental principles involved are clearly under- 
stood the details will give comparatively little 
trouble. The suggestions offered are also very 
simple and will no doubt appear absurdly so to 
the more sophisticated reader, but there are a 
surprising number of people who invest in rail- 
road stocks who do not appear to have the re- 
motest idea what their property is worth. To 
this class the foregoing is addressed in the 
hope that it will start them along the right 
road to intelligent investigations. 



172 THE PITFALLS OF SPECULATION 

Interpreting Industrial Reports. 

A historian once wrote a most interesting 
"History of Iceland" in which appears the fol- 
lowing : 

"Chapter XXV— Snakes in Iceland." 

"There are no snakes in Iceland." 

In present circumstances it looks as if we 
might almost follow this time-saving practice 
by stating that there is no way to satisfactorily 
interpret the reports of industrial corporations. 
Almost all these corporations issue only annual 
reports six months or so after the fiscal year 
closes. These reports are also incomplete, be- 
ing, in most cases, no more than an income ac- 
count and balance sheet, which are interesting 
enough as records of the past, but not very il- 
luminating as guides to the future. 

It is a sad commentary on the intelligence 
of the investment and speculative public that 
they will put their funds into the stocks of cor- 
porations w 7 hich refuse to keep them informed 
as to the progress or status of their business. 
The stockholders are the real owners of most 
of these concerns and the directors and mana- 
gers are merely their servants. Yet they are 
never allowed to know what is going on. There 
is no conceivable valid excuse for this state 
of affairs. It prevents the public from making 
advantageous purchases of stocks or from dis- 
posing of such stocks when business and profits 



SIMPLE METHODS OF ANALYSIS 173 

begin to dwindle. What is more serious, it per- 
mits a few insiders, who are constantly in touch 
with true conditions, to operate in the stock 
market to their own advantage. 

There are some exceptions to this rule, and 
in the course of time this practice of conceal- 
ment will either be voluntarily abandoned as 
a matter of policy, or will be legislated out of 
existence. The greatest corporation of all — 
the United States Steel Corporation — has al- 
ready abandoned it in part and now gives the 
public frequent reports of unfilled orders on 
hand, prices secured, monthly earnings, etc. A 
few others are falling into line and it is to be 
hoped that the day will soon come when the 
same facilities for investigation will be offered 
in the industrials as in the railroad stocks. 

About all we can do in attempting an analy- 
sis of industrial stock values is to determine, as 
nearly as possible, the property value, aside 
from earning capacity; to look up the history 
of past performances and the character of the 
management and, finally, to depend upon the 
conditions and prospects in the particular line 
of business handled by the corporation under 
review. 

In regard to property value, there is one 
point which should always receive careful at- 
tention. This is the item in the assets side of 
the balance sheet designated as "good-will." 



174 THE PITFALLS OF SPECULATION 

There has been much discussion among ac- 
countants as to whether good-will should ever 
be entered as an asset and the consensus of 
opinion now is that it should not. The present 
writer holds that there are certain conditions 
in private lines of business, or in corporations 
the stocks of which are closely held, where the 
propriety of considering good-will as an asset 
is debatable. But in the case of stocks which 
are listed and quoted on our exchanges and 
widely distributed to the public, the practice 
is a miserable one. In nine cases out of ten it 
would be better to specify huge sums as 
"water" instead of "good-will," for then the 
truth would be stated. 

A certain corporation with $25,000,000 of 
common stock outstanding will have in its as- 
sets an equal amount of "good-will." Now, this 
stock has a par value of $100 per share, all 
of which is offset by this intangible asset. But 
the stock may fall to $5 per share, giving the 
total issue an aggregate value of $1,250,000, 
yet the offsetting $25,000,000 of "good-will" 
remains rigid as $25,000,000 of "assets." 

This is preposterous. Good-will can mean 
nothing, in the final analysis, but ability to 
make profits. This ability vanishes and the 
stock declines to very low figures, but the as- 
sets do not decline at all. If tangible property 
was to vanish it would have to be written off. 



SIMPLE METHODS OF ANALYSIS 175 

For example, suppose a $5,000,000 uninsured 
plant is destroyed. It would be absolutely 
necessary to write $5,000,000 out of plant and 
property account. 

The proper method of procedure, in the case 
of stocks which cannot be covered by tangible 
assets, is to give them no par value at all, and 
some new corporations are adopting this plan. 
Where this is done the public can decide for 
themselves, according to profits and dividends, 
what the price of the stock should be, without 
being confused or misled by assets which are 
not assets. 

Mining Stocks. 

Mining stocks are usually classed as indus- 
trials. This, however, is a palpable misnomer. 
They are mining stocks and nothing else. 

A mining stock differs from railroad or indus- 
trial stocks in that the latter are perpetual and 
are supposed to increase in value and earning 
capacity as time goes on, while a mine is con- 
stantly consuming itself. When the mine is 
worked out, the stock is worthless. In most 
cases mining stocks are a good deal of a gam- 
ble, as there is no way of telling how long the 
supply of ore will last. The porphyry copper 
stocks, however, are an exception to this rule. 
The reason for this may be briefly explained. 

The length, breadth and depth of a porphyry 
deposit having been determined, the ore is sam- 



176 THE PITFALLS OF SPECULATION 

pled at various points and the results averaged. 
We now know the total amount of ore in the 
body and about how much metal it will run to 
the ton. In short, the actual amount of metal 
is a known quantity. The next step is to as- 
certain how much it will cost per pound to 
produce and market the copper. As the capac- 
ity for daily production is also a known quan- 
tity, the life of the mine is easily estimated. 
This leaves only one speculative equation, i. e., 
the average price at which the metal can be 
sold. 

As the copper is taken out and sold the cash 
received is distributed to the shareholders in 
the form of dividends, but the fact should be 
kept steadily in mind that each dividend so re- 
ceived reduces the value of the shares of stock, 
for the disbursement means that less ore now 
remains to be mined. 

The simplest way to look upon a share of 
stock in a porphyry mine is that it represents 
so many pounds of metal in the ground, which 
can be determined by a little figuring. The 
number of pounds represented by the share will 
be decreased gradually until nothing is left and 
the stock is worthless. This process of amorti- 
zation may be scientifically applied to various 
arbitrary average prices for the metal in such 
a way as to quite accurately determine the 
value of the stock at any price for the metal. 



SIMPLE METHODS OF ANALYSIS 177 

That is to say, if we assume that the average 
price of the metal during the life of the mine 
will be 15 cents per pound, we have a complete 
basis for arriving at a tentative value for the 
stock. At 16 cents the value would be greater; 
at 17 cents still greater, and so on. This should 
make it clear that in buying this class of stocks 
we need speculate only on what the future de- 
mand for and prices of the metal will be. 

It is not necessary for the man who specu- 
lates or invests to build up an extensive statis- 
tical library. The following books will give 
him all the salient facts and figures regarding 
all leading properties: 

"Moody's Analyses" (Railroads and Indus- 
trials). 

"The Earning Power of Railroads" (Mundy). 

"How to Analyze Railroad Reports" 
(Moody). 

In order to keep up to date on statistics and 
current events, the following periodicals may 
be suggested: 

"The Financial Chronicle." 

"Moody's Magazine." 

"The Financial World." 

The Standard Statistics Company furnishes a 
card system by which the statistics of all cor- 
porations are fully set forth and reduced to per- 
centages whenever advisable. These figures 
are constantly kept up to date. The cards may 



178 THE PITFALLS OF SPECULATION 

be secured either to cover only such properties 
as the subscriber may be interested in or in a 
cabinet containing data of all the leading rail- 
road and industrial companies. 

There are dozens of other excellent books 
and publications which it may be found advis- 
able to purchase from time to time, but the 
above will cover all the ordinary necessities of 
the occasional operator. 



XVI 

Conclusion 

THE three stages necessary to the develop- 
ment of the theories advanced in this 
work were, first, a recognition of the 
fact that public ventures were, considered as 
a unit, generally disastrous; second, an 
analysis of the causes which were responsible 
for this unsatisfactory fact ; and finally, a con- 
firmation of such analysis by statistical ex- 
hibits. 

Relative to the latter feature, the neces- 
sarily condensed and restricted nature of the 
figures submitted may be considered insuf- 
ficient evidence, but as it is certain that there 
is never a material division of public specu- 
lative opinion at any time, the books of even 
one house with a public clientele may be con- 
sidered a fair indication of all others. 

If the four thousand accounts, with their 
tens of thousands of operations, could be pre- 
sented in detail, this unanimity of action would 
be more apparent, and their barometrical value 
greatly magnified. 

179 



180 THE PITFALLS OF SPECULATION 

The figures submitted, however, are con- 
firmatory and not basic, and while they are 
important, in that they dovetail with precon- 
ceived opinions, the logical conclusions pre- 
sented must stand on their own bottom. 

That the public loses money in speculation 
is a notorious facft; that such losses take place 
in an arena which presents equal opportunities 
for profit or loss is indisputable, and it must 
follow, as the night the day, that the losses 
sustained are the result of mistaken judgment, 
erroneous methods, or misleading appearances. 

In presenting the different pitfalls which be- 
set the path of the speculator, and suggesting 
a means of avoiding or bridging them, it is felt 
that a thorough understanding of such dangers 
was necessary to safety and maximum good 
results. 

Fortified with a knowledge of the machinery 
of the speculative world, and its workings, the 
trader may indulge much more actively in his 
ventures than if he depended wholly upon even 
the most excellent judgment of intrinsic value. 
Thus the trader who is justified in believing 
general or individual current prices to be at 
low ebb, may act boldly and frequently with 
good results. He enters his campaign satisfied 
that material decline is improbable, that public 



CONCLUSION 181 

liquidation is complete, and that the next im- 
portant move will be upward. He brings to 
bear upon his operations his knowledge of 
technical conditions and natural market ac- 
tions, and his foundation being secure, makes 
repeated successes. He bears constantly in 
mind the fact that a limit will eventually be 
reached, a fact which is easily submerged by 
undue enthusiasm, and he knows that it is far 
better to quit too soon than too late. 

All these things are a distinct advantage in 
increasing profits and preventing loss, but they 
are of secondary importance. They are the 
branches, without which it is possible for the 
trunk to thrive, but which, themselves, will die 
if removed from the parent stem. 

The great basic principle of speculation, the 
foundation upon which the entire structure 
rests, is the recognition of value. No sustained 
success is possible without this knowledge, and 
most failures are traceable to the lack of it. 
Yet so generally is this important element dis- 
regarded, or refuted, that we find it playing 
only a small part, or no part at all, in the oper- 
ations of the average speculator. 

In the speculative world we find many men 
capable of clear thinking, correct analysis, and 
sound business judgment falling over each 



182 THE PITFALLS OF SPECULATION 

other in the rush to make purchases of prop- 
erties of which they know nothing. The in- 
centive to such purchase may be a whispered 
tip, or contagious enthusiasm, and the ridicu- 
lous equation of luck plays no inconsiderable 
part. The result is always the same. 

To those who contend that all the obtainable 
knowledge of speculative anatomy is limited 
and unreliable, let this fair question be put : 

Was there ever to your personal knowledge 
a period of speculative extremes where all, or 
most of the appearances and conditions herein 
detailed did not exist in recognizable form? 
To be more specific, when the public favorite, 
U. S. Steel, was selling at its lowest prices were 
not the technical appearances of dullness, 
pessimism, and public disgust as distinct as 
the activity and optimism had been at high 
prices? And furthermore, were not the figures 
by which an intelligent estimate of real values 
and probabilities could have been demon- 
strated in the face of claims of watered stock, 
lack of demand, and general decay, always 
obtainable? 

It was stated in the first chapter of this work 
that the maximum result obtainable in such a 
treatise would be the direction of thought into 
proper channels. The theories, and even the 



CONCLUSION 183 

established facts advanced will no doubt meet 
with opposition from that class of persons who 
allow a general denial to take the place of 
answering arguments, and who sniff at theo- 
retical deductions. Such shallow reasoners 
may at once be relegated to the ranks of the 
numerous whist players who maintain and ex- 
press an opinion that there is nothing in the 
"book game," and who, in the face of over- 
whelming evidence that they are wrong, go on 
losing games, and actually take pride in pro- 
claiming to the world their benighted con- 
dition. 

Theories, if correct, are embryotic facts, the 
value of which lies wholly in their proper ap- 
plication, and no refutation, of even a faulty 
theory, is worthy of consideration unless ac- 
companied by answering argument. 

There is, however, a large class of men ca- 
pable of clear thought and sound judgment 
who speculate unsuccessfully through allowing 
these faculties to be contorted, or lie dormant 
before the apparent mystery enveloping the 
affairs of the bourse. The properly directed 
exercise of the capabilities of these men would 
soon rob the speculative arena of both its 
mystery and its bugbears, and resolve it into 



i8 4 THE PITFALLS OF SPECULATION 

a place of business where extraordinary oppor- 
tunities were annually presented. 

To this latter class, the fltatements and de- 
ductions made herein are respectfully sub- 
mitted. 



INDEX 



Page 

ACCIDENTS 39 

Accidents: As a bear argument 39 

may begin great upward movement 40 

Accounts: Illustrate errors of speculation 123 

results of 500 in grain 137 

results of 500 in stocks 127 

Amalgamated Copper: What investigation 

would have revealed. 161 

American Sugar Refining Co.: Mr. Keene's 

operation in 120 

Assets, railroad: Consideration based on earn- 
ing ability 157 

Atchison, Topeka & Santa Fe Railroad: Con- 
trast of thirty years 152 

Bear: Assist in downfall of prices 23,33 

Bear Points: Accidents 35 

death of financier 43 

epidemic 44 

war 44 

Broker: Choice of important 54 

opinions of given too great credence 48 

Bull period: Marks of the beginning 81 

reactions and shake-outs in 82 

BUSINESS METHODS IN SPECULATION 47 

Buying: What not to buy 147 

Chart system: Anomalies of applied to grain 

trading 144 

fatuous, untrustworthy and dangerous 109 

theory of repetition 109 

Competition decreasing among railroads with 

concentration of capital 151 

CONCLUSION 179 

Corner: Danger of to short seller 119 



INDEX 

Page 

Decline: Fixed limit of, entitled to consider- 
ation 107 

following death of R. P. Flower 42 

no longer due to savage individual attacks 120 
Dividend: Payment of, not safe basis of value 155 

Drawbacks: In short selling 118 

Earnings: Importance of study of 154 

Epidemic: A bear point 44 

Facilities: Too great no advantage 16 

Financier: Death of, a bear point 43 

Flower, R. P.: Causes of decline following his 

death 42 

Fortunes: Few made on short side of stocks. 113 
Gambler: The "leader" in speculation an un- 
scrupulous one 96 

Gambling: Chart systems make speculation a 

gambling machine no 

element of, in speculation 10 

yiew of grain transactions 144 

"Going with the market": Failure of in specu- 
lative accounts 128 

Good news: Wall Street anticipates and dis- 
counts 20 

Gould, Jay: Anecdote regarding tip 91 

GRAIN SPECULATION 135 

Grain: Advantages in operations on the short 

account 142 

anomalies of chart system 144 

drawback to speculation as compared with 

stocks 139 

examination of speculative accounts 135 

gambling view of transactions in 144 

price cannot be forecasted 138 

Greed: Evidences of in speculative accounts 

examined * 129 

IGNORANCE OVERSPECULATION, ETC. 19 

Ignorance: Causes loss in speculation 14-19 

traders frequently not posted on facts.... 159 
Information Bureaus: Difference between tip- 
sters and reliable service 97 

extravagant claims of inside information.. 96 

Investigation: Ease of making. . .^ . . . . 49 

Keene, James R.: Operation in American 

Sugar Refining Co 120 

twice worsted in grain operations 145 



INDEX 

Page 
Leaders: Danger of following in speculation. 94 
Listed Securities: Advantages of choosing for 

operations 50 

classification of 150 

Litigation: Slight danger from adverse 40 

Loss: Attributed to erroneous mental opera- 
tions 128 

causes of 13 

greatest speculative 14 

larger in grain than in stocks 138 

Low-priced stocks: Exploitation methods 149 

MANIPULATION 27 

Manipulation: Methods of high finance 28 

tactics of purely speculative interests 32 

two classes of tactics defined 27 

MARKET TECHNICALITIES 73 

Market: Advance of overbought impossible... 73 

distance from an advantage 130 

earmarks of • 15 

general swing market/ by significant ap- 
pearances .' 80 

how top may be discerned 83 

material decline of oversold impossible... 73 

method of unloading at the top. 84 

recognition of bad technical position 79 

signs of beginning of bull movement 81 

technicalities of 73 

Margin: Inadequate leads to ultimate failure- 46 

Mechanical methods: Explained : 99 

not an interference with study and judg- 
ment 109 

useful in aid of previously formed judg- 
ment 100 

MECHANICAL SPECULATION 99 

Mines: A certain market for good 126 

Overspeculation: Primary cause of wide varia- 
tions in prices 21 

Percentage Adverse to trader trebled by per- 
sonal actions 128 

Profits^ Greatest speculative 14 

Properties: Examination of physical and finan- 
cial conditions necessary 159 

PUBLIC ATTITUDE TOWARD SPECULA- 
TION 9 

Public: Its undoing the aim of manipulators.. 34 



INDEX 

Page 

participators at wrong time 24 

too large a following not desirable 33 

Public Sentiment: Experienced speculators op- 
erate in reversion 23 

makes new security a favorite 154 

Railroad: Assets considered only as earning 

ability 160 

Railroad Securities: Gradual increase in value 

certain 151 

safer than industrials ; 151 

Reasoning: Reversed in speculative matters. .23, 32 

Repetition: Theory of 109 

Scale order: As employed in accounts ana- 
lyzed 127 

best use of 104 

explained 100 

extended campaign and long purse called 

for 103 

misuse of 102 

Securities: Rails safer than industrials 129 

SHORT SELLING 113 

Short selling: Continual tampering with prog- 
ress 119 

danger of corner 119 

earnings and enhancements of value 

against the trader 116 

extremely hazardous in numerous company 78 

few good traders on the short side 114 

not as profitable as supposed 113, 115 

popularity founded on pessimism 113 

results in loss * 15 

transactions followed 117 

Speculation: Ample margin required by good 

business methods 52 

appearance of a speculative cycle 75 

attitude of public toward 9 

business methods in 47 

danger of following so-called leaders 94 

essentials of business-like 53 

facts applicable to 13 

gambling element in 10 

general ideas the reverse of truth 15 

individual study and investigation neces- 
sary 49 



INDEX 

Page 

manipulative and technical conditions to be 

considered 159 

misleading surface appearance 24 

only widespread and severe disaster can 

change its cycles 42 

public participates at wrong time 24 

requirements of successful 25 

safe under business methods 16 

safest course 122 

mechanical methods explained go, 

reasonable basis of no 

recognition of value its basic principle... 181 

solid groundwork for ventures 154 

systems for judging changes impossible... 14 

Stocks: Low priced offered to public at about 

double value 148 

wildcat and untried should be eliminated. 147 

Stop-loss order: Theory of 105 

SUGGESTIONS AS TO INTELLIGENT 

METHODS 147 

Theory: Postulates of the author in this work. 179 

Ticker: Distorts perspective to speculator 53 

most useful to professional scalpers 53 

Tip: A possible stimulus to investigation 98 

anecdote regarding Jay Gould 91 

as analyzed by the man who knows 98 

causes abandonment of manipulating plans 90 

disseminated by private wire houses 92 

founded on guesswork or invention 92 

frequently more or less correct 96 

illogical character of 14, 89 

TIPS 89 

United States Steel: Analysis of 500 specula- 
tive accounts in 126 

exemplar of methods of "high finance"... 28 

Value: Determination of ■ 157 

recognition of the basic principle of specu- 
lation 181 

War: A bear point 44 

reason for higher prices of food products. 142 

WHAT 500 SPECULATIVE ACCOUNTS 

SHOWED 123 



